Answers for Capital budgeting Case study 2025

1.1

The initial investment includes the cost of the new equipment, transportation costs, and the
increase in working capital. It also includes the cost of removing the old equipment and the
proceeds from selling the old equipment.



Initial investment = Cost of new equipment + Transportation costs + Increase in working
capital - Proceeds from selling old equipment + Cost of removing old equipment + tax on
sale of old equipment

Initial investment = R2 500 000 + R100 000 + R250 000 - R500 000 + R50 000 + 37 800

Initial investment = R2 437 800



1.2

The annual operating cash flows include the increase in EBITDA, depreciation, and the tax.



Annual operating cash flows = Increase in EBITDA – Depreciation – tax + depreciation

Depreciation = (R2 500 000 - R0) / 5 = R500 000

Tax = (EBITDA – Depreciation) x Tax rate = (848700 - R500 000) x 27% = R94 149

Annual operating cash flows = R848 700 - R500 000 – R94 149 + R500 000

Annual operating cash flows = R754 551



1. 3

The terminal cash flows include the proceeds from selling the new equipment, the cost of
removing the new equipment, and the cost of removing the old equipment and working
capital

Terminal cash flows = Proceeds from selling new equipment - Cost of removing new
equipment - Cost of removing old equipment – tax on sell + working capital

Tax = (200 000- 110 000) x 27% = R24 300