FIN4801
ASSIGNMENT 4 2025
UNIQUE NO.
DUE DATE: 8 AUGUST 2025
, QUESTION 1 (20 Marks)
Project Overview:
Initial cost of machinery: R800,000
Installation cost: R200,000
Total initial investment: R1,000,000
Project life: 4 years
Annual sales: R1,500,000 (real terms)
Variable costs: 60% of sales
Fixed costs: R200,000 (real terms)
Depreciation: Straight-line over 4 years = R1,000, = R250,000 per year
Salvage value (end of Year 4): R1,200,000 (nominal terms)
Tax rate: 27%
Risk-free rate: 10%
Market risk premium: 5%
Beta: 1.5
Inflation: 4%
A) Relevant Cash Flows (in nominal terms)
To convert real sales and costs to nominal:
Nominal amount=Real amount×(1+inflation)t\text{Nominal amount} = \text{Real amount}
\times (1 + \text{inflation})^tNominal amount=Real amount×(1+inflation)t
Let's calculate for each year (Year 1–4):
ASSIGNMENT 4 2025
UNIQUE NO.
DUE DATE: 8 AUGUST 2025
, QUESTION 1 (20 Marks)
Project Overview:
Initial cost of machinery: R800,000
Installation cost: R200,000
Total initial investment: R1,000,000
Project life: 4 years
Annual sales: R1,500,000 (real terms)
Variable costs: 60% of sales
Fixed costs: R200,000 (real terms)
Depreciation: Straight-line over 4 years = R1,000, = R250,000 per year
Salvage value (end of Year 4): R1,200,000 (nominal terms)
Tax rate: 27%
Risk-free rate: 10%
Market risk premium: 5%
Beta: 1.5
Inflation: 4%
A) Relevant Cash Flows (in nominal terms)
To convert real sales and costs to nominal:
Nominal amount=Real amount×(1+inflation)t\text{Nominal amount} = \text{Real amount}
\times (1 + \text{inflation})^tNominal amount=Real amount×(1+inflation)t
Let's calculate for each year (Year 1–4):
