FIN3701 Assignment 1 (ANSWERS) Semester 1 2026 - DISTINCTION GUARANTEED

Comprehensively structured FIN3701 Assignment 1 (ANSWERS) Semester 1 2026 - DISTINCTION GUARANTEED. Prepared to a distinction standard with detailed and well-developed responses.. Bottling Ltd is a manufacturer of glass bottles. The company has been advised by a consultant to introduce plastic bottles for the 2027 Rugby World Cup, as glass bottles will not be allowed in any of the stadiums. The consultant charged a fee of R14 000 for conducting the market study. To produce the plastic bottles, the company will need to purchase a machine costing R120 000, as well as two moulds – one for the containers and one for the lids – at a total cost of R22 000. The machine will be depreciated using the straight-line method over a useful life of two years. At the end of the two year period, the machine is expected to be sold for 23% of its original cost. The consultant estimates sales of R80 000 in the first year, with a projected decrease of 10% in the second year. The total fixed costs are expected to be R4 500 per year, while variable costs are estimated at 15% of sales. Bottling Ltd will need plastic material valued at R1 200 to commence production. Of this amount, R1 000 will be financed using the company’s overdraft facility. The company’s cost of capital is 10%, and both income and capital gains are taxed at a rate of 29%. Calculate the initial investment required for the purchase of the new machine Calculate the depreciation generated by ththe two moulds for year year 2. (10 marks) What will be the tax effect on the terminal cash flow arising from the disposal of the machine at the end of its useful life? (4 marks) Calculate the NPV of the investment in the new machine and the two moulds. Marombo currently has a portfolio of ordinary shares representing several different companies. Marombo considers it to be a well balanced investment portfolio, but he wants to reduce the overall risk of the portfolio a bit more by including ordinary shares from Mamphela Mining Corporation. The following information on Mamphela Mining Corporation is available. For the period 2020 to 2023, the company paid the following dividends per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2024 dividend is expected to increase by the average growth rate of the dividends between 2020 and 2023, and the dividend will increase by 10 percent per year indefinitely from 2022 onwards. Marombo requires a return of 12 percent on his investment portfolio and is not prepared to pay more than R52,00 per ordinary share of Mamphela Mining Corporation. REQUIRED Calculate the current price of Mamphela Mining Corporation ordinary share. Should Marombo purchase Mamphela Mining Corporation shares to include in his investment portfolio? Provide reasons for your answer. The power systems company, Raging Volts, is currently 80 percent equity financed and aims to raise R2 million to fund a set of attractive investment opportunities. Debt financing may be obtained at an after tax cost of 15 percent. The company management wants to introduce 60 percent debt in the capital structure while keeping the cost of each financing source together with its market value the same. Ordinary shares are currently selling for R30 per share. The company paid a dividend of R1,50 per share in the previous financial year and had a growth rate of 7 percent over the past few years. It is expected that this growth rate will be maintained in future. The company tax rate is 29 percent. The company has a market value of R300 000. REQUIRED Calculate the component costs associated with capital investment financing. Calculate the weighted average cost of capital, the break point of equity and the break point of debt under the current structure. Calculate the weighted average cost of capital, the break point of equity and the break point of debt under the proposed structure. Calculate the number of shares under the current structure. Calculate the number of shares under the proposed structure. Mphoreng Industries is considering replacing its existing machine, which was purchased three years ago at a cost of R1 million. The machine is depreciated at 30 percent per annum and can be sold today at R900 000. The new machine will cost R700 000 with R20 000 installation cost and R5 000 transportation costs. The use of the new machine will decrease the working capital with R8 000. Assume a 40 percent capital gains tax per annum. REQUIRED Calculate the book value of the existing machine. Show all calculations. Calculate the tax implication from the sale of the existing machine. Calculate the after tax proceeds from the sale of the existing machine. Calculate the initial investment associated with the replacement of the existing machine. A firm with a cost of capital of 11 percent is evaluating two mutually exclusive projects, X and Y. The initial investment is R400 000 for project X and R525 000 for project Y. Cash inflows associated with the two projects are given below. Year Project X Cash inflows 6 50 000 Project Y Cash inflows 100 000 REQUIRED Which project should the firm choose, considering risk concepts in capital budgeting? Bottling Ltd is a manufacturer of glass bottles. The company has been advised by a consultant to introduce plastic bottles for the 2027 Rugby World Cup, as glass bottles will not be allowed in any of the stadiums. The consultant charged a fee of R14 000 for conducting the market study. To produce the plastic bottles, the company will need to purchase a machine costing R120 000, as well as two moulds – one for the containers and one for the lids – at a total cost of R22 000. The machine will be depreciated using the straight-line method over a useful life of two years. At the end of the two- year period, the machine is expected to be sold for 23% of its original cost. The consultant estimates sales of R80 000 in the first year, with a projected decrease of 10% in the second year. The total fixed costs are expected to be R4 500 per year, while variable costs are estimated at 15% of sales. Bottling Ltd will need plastic material valued at R1 200 to commence production. Of this amount, R1 000 will be financed using the company’s overdraft facility. The company’s cost of capital is 10%, and both income and capital gains are taxed at a rate of 29%. REQUIRED: 1.1 1.2 1.3 1.4 Calculate the initial investment required for the purchase of the new machine and the two moulds. (4 marks) Calculate the operating cash inflows generated by the new machine and the two moulds for year 1 and year 2. (10 marks) What will be the tax effect on the terminal cash flow arising from the disposal of the machine at the end of its useful life? (4 marks) Calculate the internal rate of return (IRR) of the investment in the new machine and the two moulds. Tyres Manufacturers plans to expand its production capacity in 2026 by investing R14 million in new plants and machinery. Management aims to maintain the current 40% debt in the firm’s capital structure. Moreover, management expects a net income of R2,8 million and intends to base dividend payments on the residual dividend theory. Debt financing can be obtained at a before-tax cost of 16%. The firm may also issue ordinary shares, which are currently selling for R30 each, at a net price of R20 per share after flotation costs. The firm paid a dividend (Do) of R1,50 per share in the previous financial year, and dividends have grown at an average rate of 7% in recent years. This growth rate is expected to continue in the future. The corporate tax rate is 40%. Identify the different forms and amounts of new financing required to fund the project. Calculate the component costs Mphoreng Industries is considering replacing its existing machine, which was purchased three years ago at a cost of R1 million. The machine is depreciated at 30 percent per annum and can be sold today at R900 000. The new machine will cost R700 000 with R20 000 installation cost and R5 000 transportation costs. The use of the new machine will decrease the working capital with R8 000. Assume a 40 percent capital gains tax per annum. REQUIRED Calculate the book value of the existing machine. Show all calculations. Calculate the tax implication from the sale of the existing machine. Calculate the after tax proceeds from the sale of the existing machine. Calculate the initial investment associated with the replacement of the existing machine. A firm with a cost of capital of 11 percent is evaluating two mutually exclusive projects, X and Y. The initial investment is R400 000 for project X and R525 000 for project Y. Cash inflows associated with the two projects are given below. Year Project X Cash inflows 6 50 000 Project Y Cash inflows 100 000 REQUIRED Which project should the firm choose, considering risk concepts in capital budgeting? Marombo currently has a portfolio of ordinary shares representing several different companies. Marombo considers it to be a well balanced investment portfolio, but he wants to reduce the overall risk of the portfolio a bit more by including ordinary shares from Mamphela Mining Corporation. The following information on Mamphela Mining Corporation is available. For the period 2020 to 2023, the company paid the following dividends per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2024 dividend is expected to increase by the average growth rate of the dividends between 2020 and 2023, and the dividend will increase by 10 percent per year indefinitely from 2022 onwards. Marombo requires a return of 12 percent on his investment portfolio and is not prepared to pay more than R52,00 per ordinary share of Mamphela Mining Corporation. REQUIRED Calculate the current price of Mamphela Mining Corporation ordinary share. Should Marombo purchase Mamphela Mining Corporation shares to include in his investment portfolio? Provide reasons for your answer. The power systems company, Raging Volts, is currently 80 percent equity financed and aims to raise R2 million to fund a set of attractive investment opportunities. Debt financing may be obtained at an after tax cost of 15 percent. The company management wants to introduce 60 percent debt in the capital structure while keeping the cost of each financing source together with its market value the same. Ordinary shares are currently selling for R30 per share. The company paid a dividend of R1,50 per share in the previous financial year and had a growth rate of 7 percent over the past few years. It is expected that this growth rate will be maintained in future. The company tax rate is 29 percent. The company has a market value of R300 000. Evans Industries needs additional aluminium extrusion capacity and has to choose between three machines: A, B and C. Each machine can meet the company’s needs and carries the same level of risk. The company will evaluate all three options using a cost of capital of 12%. The table below shows the initial investment and the expected annual cash inflows for each machine over its useful life. Year Machine A Machine B Machine C 0 (R92 000) (R65 000) (R100 500) 1 R12 000 R10 000 R30 000 2 R12 000 R20 000 R30 000 3 R12 000 R30 000 R30 000 4 R12 000 R40 000 R13 000 5 R12 000 - R30 000 6 R12 000 Calculate the net present value (NPV) of each machine over its useful life. Calculate the annualised net present value (ANPV) of each machine. Based on the calculated NPV and ANPV, which machine(s) should the firm purchase? REQUIRED Calculate the component costs associated with capital investment financing. Calculate the weighted average cost of capital, the break point of equity and the break point of debt under the current structure. A firm is considering two mutually exclusive projects. Project M has a life of four years and an NPV of R2 855 000. Project N has a life of six years and an NPV of R4 540 800. The firm’s cost of capital is 15%. Calculate the ANPV of both project M and project N. Calculate the weighted average cost of capital, the break point of equity and the break point of debt under the proposed structure. Calculate the number of shares under the current structure. Calculate the number of shares under the proposed structure. Bottling Ltd is a manufacturer of glass bottles. The company has been advised by a consultant to introduce plastic bottles for the 2027 Rugby World Cup, as glass bottles will not be allowed in any of the stadiums. The consultant charged a fee of R14 000 for conducting the market study. To produce the plastic bottles, the company will need to purchase a machine costing R120 000, as well as two moulds – one for the containers and one for the lids – at a total cost of R22 000. The machine will be depreciated using the straight-line method over a useful life of two years. At the end of the two year period, the machine is expected to be sold for 23% of its original cost. The consultant estimates sales of R80 000 in the first year, with a projected decrease of 10% in the second year. The total fixed costs are expected to be R4 500 per year, while variable costs are estimated at 15% of sales. Bottling Ltd will need plastic material valued at R1 200 to commence production. Of this amount, R1 000 will be financed using the company’s overdraft facility. The company’s cost of capital is 10%, and both income and capital gains are taxed at a rate of 29%. Bottling Ltd is a manufacturer of glass bottles. The company has been advised by a consultant to introduce plastic bottles for the 2027 Rugby World Cup, as glass bottles will not be allowed in any of the stadiums. The consultant charged a fee of R14 000 for conducting the market study. To produce the plastic bottles, the company will need to purchase a machine costing R120 000, as well as two moulds – one for the containers and one for the lids – at a total cost of R22 000. The machine will be depreciated using the straight-line method over a useful life of two years. At the end of the two year period, the machine is expected to be sold for 23% of its original cost. The consultant estimates sales of R80 000 in the first year, with a projected decrease of 10% in the second year. The total fixed costs are expected to be R4 500 per year, while variable costs are estimated at 15% of sales. Bottling Ltd will need plastic material valued at R1 200 to commence production. Of this amount, R1 000 will be financed using the company’s overdraft facility. The company’s cost of capital is 10%, and both income and capital gains are taxed at a rate of 29%. Calculate the initial investment required for the purchase of the new machine Calculate the depreciation generated by ththe two moulds for year year 2. (10 marks) What will be the tax effect on the terminal cash flow arising from the disposal of the machine at the end of its useful life? (4 marks) Calculate the NPV of the investment in the new machine and the two moulds. Marombo currently has a portfolio of ordinary shares representing several different companies. Marombo considers it to be a well balanced investment portfolio, but he wants to reduce the overall risk of the portfolio a bit more by including ordinary shares from Mamphela Mining Corporation. The following information on Mamphela Mining Corporation is available. For the period 2020 to 2023, the company paid the following dividends per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2024 dividend is expected to increase by the average growth rate of the dividends between 2020 and 2023, and the dividend will increase by 10 percent per year indefinitely from 2022 onwards. Marombo requires a return of 12 percent on his investment portfolio and is not prepared to pay more than R52,00 per ordinary share of Mamphela Mining Corporation. REQUIRED Calculate the current price of Mamphela Mining Corporation ordinary share. Should Marombo purchase Mamphela Mining Corporation shares to include in his investment portfolio? Provide reasons for your answer. The power systems company, Raging Volts, is currently 80 percent equity financed and aims to raise R2 million to fund a set of attractive investment opportunities. Debt financing may be obtained at an after tax cost of 15 percent. The company management wants to introduce 60 percent debt in the capital structure while keeping the cost of each financing source together with its market value the same. Ordinary shares are currently selling for R30 per share. The company paid a dividend of R1,50 per share in the previous financial year and had a growth rate of 7 percent over the past few years. It is expected that this growth rate will be maintained in future. The company tax rate is 29 percent. The company has a market value of R300 000. REQUIRED Calculate the component costs associated with capital investment financing. Calculate the weighted average cost of capital, the break point of equity and the break point of debt under the current structure. Calculate the weighted average cost of capital, the break point of equity and the break point of debt under the proposed structure. Calculate the number of shares under the current structure. Calculate the number of shares under the proposed structure. Mphoreng Industries is considering replacing its existing machine, which was purchased three years ago at a cost of R1 million. The machine is depreciated at 30 percent per annum and can be sold today at R900 000. The new machine will cost R700 000 with R20 000 installation cost and R5 000 transportation costs. The use of the new machine will decrease the working capital with R8 000. Assume a 40 percent capital gains tax per annum. REQUIRED Calculate the book value of the existing machine. Show all calculations. Calculate the tax implication from the sale of the existing machine. Calculate the after tax proceeds from the sale of the existing machine. Calculate the initial investment associated with the replacement of the existing machine. A firm with a cost of capital of 11 percent is evaluating two mutually exclusive projects, X and Y. The initial investment is R400 000 for project X and R525 000 for project Y. Cash inflows associated with the two projects are given below. Year Project X Cash inflows 6 50 000 Project Y Cash inflows 100 000 REQUIRED Which project should the firm choose, considering risk concepts in capital budgeting? Bottling Ltd is a manufacturer of glass bottles. The company has been advised by a consultant to introduce plastic bottles for the 2027 Rugby World Cup, as glass bottles will not be allowed in any of the stadiums. The consultant charged a fee of R14 000 for conducting the market study. To produce the plastic bottles, the company will need to purchase a machine costing R120 000, as well as two moulds – one for the containers and one for the lids – at a total cost of R22 000. The machine will be depreciated using the straight-line method over a useful life of two years. At the end of the two- year period, the machine is expected to be sold for 23% of its original cost. The consultant estimates sales of R80 000 in the first year, with a projected decrease of 10% in the second year. The total fixed costs are expected to be R4 500 per year, while variable costs are estimated at 15% of sales. Bottling Ltd will need plastic material valued at R1 200 to commence production. Of this amount, R1 000 will be financed using the company’s overdraft facility. The company’s cost of capital is 10%, and both income and capital gains are taxed at a rate of 29%. REQUIRED: 1.1 1.2 1.3 1.4 Calculate the initial investment required for the purchase of the new machine and the two moulds. (4 marks) Calculate the operating cash inflows generated by the new machine and the two moulds for year 1 and year 2. (10 marks) What will be the tax effect on the terminal cash flow arising from the disposal of the machine at the end of its useful life? (4 marks) Calculate the internal rate of return (IRR) of the investment in the new machine and the two moulds. Tyres Manufacturers plans to expand its production capacity in 2026 by investing R14 million in new plants and machinery. Management aims to maintain the current 40% debt in the firm’s capital structure. Moreover, management expects a net income of R2,8 million and intends to base dividend payments on the residual dividend theory. Debt financing can be obtained at a before-tax cost of 16%. The firm may also issue ordinary shares, which are currently selling for R30 each, at a net price of R20 per share after flotation costs. The firm paid a dividend (Do) of R1,50 per share in the previous financial year, and dividends have grown at an average rate of 7% in recent years. This growth rate is expected to continue in the future. The corporate tax rate is 40%. Identify the different forms and amounts of new financing required to fund the project. Calculate the component costs Mphoreng Industries is considering replacing its existing machine, which was purchased three years ago at a cost of R1 million. The machine is depreciated at 30 percent per annum and can be sold today at R900 000. The new machine will cost R700 000 with R20 000 installation cost and R5 000 transportation costs. The use of the new machine will decrease the working capital with R8 000. Assume a 40 percent capital gains tax per annum. REQUIRED Calculate the book value of the existing machine. Show all calculations. Calculate the tax implication from the sale of the existing machine. Calculate the after tax proceeds from the sale of the existing machine. Calculate the initial investment associated with the replacement of the existing machine. A firm with a cost of capital of 11 percent is evaluating two mutually exclusive projects, X and Y. The initial investment is R400 000 for project X and R525 000 for project Y. Cash inflows associated with the two projects are given below. Year Project X Cash inflows 6 50 000 Project Y Cash inflows 100 000 REQUIRED Which project should the firm choose, considering risk concepts in capital budgeting? Marombo currently has a portfolio of ordinary shares representing several different companies. Marombo considers it to be a well balanced investment portfolio, but he wants to reduce the overall risk of the portfolio a bit more by including ordinary shares from Mamphela Mining Corporation. The following information on Mamphela Mining Corporation is available. For the period 2020 to 2023, the company paid the following dividends per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2024 dividend is expected to increase by the average growth rate of the dividends between 2020 and 2023, and the dividend will increase by 10 percent per year indefinitely from 2022 onwards. Marombo requires a return of 12 percent on his investment portfolio and is not prepared to pay more than R52,00 per ordinary share of Mamphela Mining Corporation. REQUIRED Calculate the current price of Mamphela Mining Corporation ordinary share. Should Marombo purchase Mamphela Mining Corporation shares to include in his investment portfolio? Provide reasons for your answer. The power systems company, Raging Volts, is currently 80 percent equity financed and aims to raise R2 million to fund a set of attractive investment opportunities. Debt financing may be obtained at an after tax cost of 15 percent. The company management wants to introduce 60 percent debt in the capital structure while keeping the cost of each financing source together with its market value the same. Ordinary shares are currently selling for R30 per share. The company paid a dividend of R1,50 per share in the previous financial year and had a growth rate of 7 percent over the past few years. It is expected that this growth rate will be maintained in future. The company tax rate is 29 percent. The company has a market value of R300 000. Evans Industries needs additional aluminium extrusion capacity and has to choose between three machines: A, B and C. Each machine can meet the company’s needs and carries the same level of risk. The company will evaluate all three options using a cost of capital of 12%. The table below shows the initial investment and the expected annual cash inflows for each machine over its useful life. Year Machine A Machine B Machine C 0 (R92 000) (R65 000) (R100 500) 1 R12 000 R10 000 R30 000 2 R12 000 R20 000 R30 000 3 R12 000 R30 000 R30 000 4 R12 000 R40 000 R13 000 5 R12 000 - R30 000 6 R12 000 Calculate the net present value (NPV) of each machine over its useful life. Calculate the annualised net present value (ANPV) of each machine. Based on the calculated NPV and ANPV, which machine(s) should the firm purchase? REQUIRED Calculate the component costs associated with capital investment financing. Calculate the weighted average cost of capital, the break point of equity and the break point of debt under the current structure. A firm is considering two mutually exclusive projects. Project M has a life of four years and an NPV of R2 855 000. Project N has a life of six years and an NPV of R4 540 800. The firm’s cost of capital is 15%. Calculate the ANPV of both project M and project N. Calculate the weighted average cost of capital, the break point of equity and the break point of debt under the proposed structure. Calculate the number of shares under the current structure. Calculate the number of shares under the proposed structure. Bottling Ltd is a manufacturer of glass bottles. The company has been advised by a consultant to introduce plastic bottles for the 2027 Rugby World Cup, as glass bottles will not be allowed in any of the stadiums. The consultant charged a fee of R14 000 for conducting the market study. To produce the plastic bottles, the company will need to purchase a machine costing R120 000, as well as two moulds – one for the containers and one for the lids – at a total cost of R22 000. The machine will be depreciated using the straight-line method over a useful life of two years. At the end of the two year period, the machine is expected to be sold for 23% of its original cost. The consultant estimates sales of R80 000 in the first year, with a projected decrease of 10% in the second year. The total fixed costs are expected to be R4 500 per year, while variable costs are estimated at 15% of sales. Bottling Ltd will need plastic material valued at R1 200 to commence production. Of this amount, R1 000 will be financed using the company’s overdraft facility. The company’s cost of capital is 10%, and both income and capital gains are taxed at a rate of 29%.