FIN4801 Assignment 4 (COMPLETE ANSWERS) 2025 – DUE 8 August 2025; 100% correct solutions and explanations.

FIN4801 Assignment 4 (COMPLETE ANSWERS) 2025 – DUE 8 August 2025; 100% correct solutions and explanations.Question 1 (20 Marks) Mapex Ltd., a geoinformatics company is expanding into drone manufacturing to diversify its operations. This project has an initial life of 4 years and the initial costs of the machinery (which is the only significant initial cost) is R800 000 while the related installation costs is R200 000. The projects are expected to generate sales of R1 500 000 each year (expressed in real terms). Variable costs are expected to amount to 60% of sales while fixed costs are expected to be R200 000 (in real terms). The machinery for the project can be depreciated over 4 years and the tax rate is 27%. The machinery can be sold for R1 200 000 at the end of the project (in nominal terms). The company is wholly financed by equity. The risk-free rate is 10% and the market risk premium is 5%. The company currently has a beta of 1.5 while that of the drone industry is 1.5. Inflation is 4%. Required: Adjust the cash flows for inflation where necessary and identify the relevant cash flows of the project (12) Determine the most appropriate discount rate to use for the project (3) Discuss the acceptability of the project, mention how you adjusted for inflation and risk and what impact this had on the resultant NPV. (5) Question 2 (4 Marks) Miles Ltd., a manufacturer of various car products wants to estimate its funding requirements for the coming financial year. In the recent past, the company had spare production capacity, but increased sales has raised suspicions amongst management that investment in new capacity may be required soon. In the current financial year the company achieved sales of R200 million on assets worth R3 000 million and liabilities of R800m. It’s resulting net profit margin was 5% with no dividend being paid as the company is in a high growth phase. All assets and liabilities are considered spontaneous and increase in line with sales. It is expected that sales will grow by 30% in the coming year. Assets are however only utilized up to 90% of total capacity and the spare capacity can be used first before