Johannesburg Stock Exchange - Randolph - Internal Rate - Assessment Answer

Johannesburg Stock Exchange - Randolph - Internal Rate - Assessment Answer 

Assessment Task:

QUESTION 1

The Randolph Limited has decided to acquire a new truck. One alternative is to lease the truck on a 4-year guideline contract for a lease payment of R10,000 per year, with payments to be made at the beginning of each year. The lease would include maintenance. Alternatively, Randolph Limited could purchase the truck outright for R40,000, financing the purchase by a bank loan for the net purchase price and amortizing the loan over a 4-year period at an interest rate of 10% per year. Under the borrow-to-purchase arrangement, RTC would have to maintain the truck at a cost of R1,000 per year, payable at year end. The truck falls into the MACRS 3-year class. It has a residual value of R10,000, which is the expected market value after 4 years, when Randolph Ltd plans to replace the truck irrespective of whether it leases or buys. Randolph Limited has a marginal tax rate of 40%.

• What is Randolph’s Present Value cost of leasing?
• What is Randolph’s Present Value cost of owning? Should the truck be leased or purchased?
• The appropriate discount rate for use in the analysis is the firm’s after-tax cost of debt. Why

QUESTION 2
Curechem SA Limited is a large publicly traded firm on the Johannesburg Stock Exchange. Based on an R100,000 market feasibility study it is considering the manufacture and sale of a new line of products developed by its R&D research group at a cost of R 250,000. The finance department has gathered the following information on the investment proposal:

Required:

• Calculate the flowing values for the investment proposal:
•  Net present value
• Internal rate of return
• Briefly discuss your findings and advise whether the proposal is financially attractive.
• Assuming that the stock market is semi-strong efficient, what will be the implication for the firm’s stock price if CureChem goes ahead with the project?

QUESTION 4
Navidad, a listed engineering company, manufactures large scale plant and machinery for industrial companies. Until ten years ago, Navidale Limited pursued a strategy of organic growth. Since then, it has followed an aggressive policy of acquiring smaller engineering companies, which it feels have developed new technologies and methods, which could be used in its manufacturing processes. However, it is estimated that only between 30% and 40% of the acquisitions made in the last ten years have successfully increased the company’s shareholder value.
Navidad Limited is currently considering acquiring Lochinvar, an unlisted company, which has three departments. Department A manufactures machinery for industrial companies, Department B produces electrical goods for the retail market, and the smaller Department C operates in the construction industry. Upon acquisition, Department A will become part of Navidale, as it contains the new technologies which Navidale is seeking, but Departments B and C will be unbundled, with the assets attached to Department C sold and Department B being spun off into a new company called Ndege Co.

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