COFM302 - Financial Management - Financial Management Assignment Help

Assignment Task

Question 1 - Econet Pty Ltd manufactures cell phones. The company is considering the replacement of outdated equipment. The new equipment will be used to produce both the existing product line and a new line of cellphones. The cost of the new equipment is R9.8 million.
The expected residual value of the new equipment in four years’ time will be R2.6 million. The new cellphones will sell for R800 per unit and a variable cost of R450 per unit. The company forecasts sales of two (2) cell phones per week for the next four years. The new equipment is also expected to reduce the cost of producing the existing product line by R10 000 per month for the next four years.
The current market value of the present equipment is R320 000. The equipment is expected to have a residual value of zero in four years’ time.
The investment in working capital, which will occur at the beginning of the year, will amount to R600 000, and 80% of this working capital balance will be recovered at the end of year 4.
The company is expecting the following tax payments as a result of this investment:
R
Year 1 85 000
Year 2 98 000
Year 3 112 000
Year 4 123 000
The company’s cost of capital is 14% and the tax rate is 28%.
Hunde, T. (2020)

Required:
Determine, on the basis of NPV, whether the company should replace the outdated equipment.

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