FIN3701 EXAM
PACK 2022
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FIN3701
CONFIDENTIAL
OCTOBER/NOVEMBER 2022
QUESTION 1 [10 marks]
Kaufold Ltd, a large manufacturer of aircraft components, has a capital budget of R2 000 000
and is evaluating the replacement of its existing machine with the more sophisticated model.
The CFO determined the initial investment required and the terminal cash flow associated with
the replacement to be R1 666 000 and R254 000 respectively. Both the usable life of the
proposed and the remaining life of the current machine are 5 years.
Expected cash inflows relating to the investments are as follow:
Year Proposed machine Current machine
1 986 000 895 000
2 986 000 881 000
3 986 000 819 000
4 986 000 805 000
5 986 000 791 000
Kaufold Ltd’s WACC is 15% and it is taxed at 29%.
REQUIRED
1.1 Calculate the incremental cash flows relating to the replacement decision. (6 marks)
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FIN3701
CONFIDENTIAL
OCTOBER/NOVEMBER 2021
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FIN3701
CONFIDENTIAL
OCTOBER/NOVEMBER 2021
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PACK 2022
, Stuvia.com - The study-notes marketplace
Page 5 of 45
FIN3701
CONFIDENTIAL
OCTOBER/NOVEMBER 2022
QUESTION 1 [10 marks]
Kaufold Ltd, a large manufacturer of aircraft components, has a capital budget of R2 000 000
and is evaluating the replacement of its existing machine with the more sophisticated model.
The CFO determined the initial investment required and the terminal cash flow associated with
the replacement to be R1 666 000 and R254 000 respectively. Both the usable life of the
proposed and the remaining life of the current machine are 5 years.
Expected cash inflows relating to the investments are as follow:
Year Proposed machine Current machine
1 986 000 895 000
2 986 000 881 000
3 986 000 819 000
4 986 000 805 000
5 986 000 791 000
Kaufold Ltd’s WACC is 15% and it is taxed at 29%.
REQUIRED
1.1 Calculate the incremental cash flows relating to the replacement decision. (6 marks)
[TURN OVER]
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FIN3701
CONFIDENTIAL
OCTOBER/NOVEMBER 2021
[TURN OVER]
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FIN3701
CONFIDENTIAL
OCTOBER/NOVEMBER 2021
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