Enoch Mabena is one of the successful Tenderprenuers in South Africa who owns Royal Projects, a company that supplies personal protective equipment (PPE). Enoch founded the company in March 2020. In its mission statements it emphases that it supplies superior, affordable and consistently high-quality PPE. In April 2020, the company successfully beat its rivals by securing a 4-year tender to supply PPE to the Gauteng department of health to be used by frontline doctors, nurses and occupational therapists. The project will add revenue amounting to R2 900 000 annually. Royal Projects accepts projects that have a payback period of two years or less. In order to establish the viability of the project, market research was conducted at a cost of R190 000. The expenses involved in the project would be substantial, and new equipment would need to be purchased at a cost of R3 000 000. The equipment could be financed by a loan from Standard Bank at 10% interest per annum. For tax purposes the equipment could be depreciated over 4 years using the 40:30:20:10 wear and tear allowed by the South African Revenue Service, after which it would be sold at its scrap value of R48 000. Part of the cost of new equipment will be off-set by the proceed from sale of the old equipment. Details of the current equipment are as follows: Cost. R1 000 000 Resale value. R300 000 Useful life. 4 years Depreciation: the same as the new equipment The equipment was purchased four years ago. The company will also incur variable costs amounting to 0.067 of sales and fixed costs of R250 000 annually. The cost of capital is 12%. The use of the new equipment will result in the following changes in net working capital: Accruals. -R2000 Inventory. +R50 000 Accounts payable. +R40 000 Accounts receivable. +R70 000 Cash. +R5000 Notes payable. + R15000 Income and capital gains tax are taxed at 29%. Calculate the initial investment associated with the project and replacement of the new equipment.
Enoch Mabena is one of the successful Tenderprenuers in South Africa who owns Royal Projects, a company that supplies personal protective equipment (PPE). Enoch founded the company in March 2020. In its mission statements it emphases that it supplies superior, affordable and consistently high-quality PPE. In April 2020, the company successfully beat its rivals by securing a 4-year tender to supply PPE to the Gauteng department of health to be used by frontline doctors, nurses and occupational therapists. The project will add revenue amounting to R2 900 000 annually. Royal Projects accepts projects that have a payback period of two years or less. In order to establish the viability of the project,
The expenses involved in the project would be substantial, and new equipment would need to be purchased at a cost of R3 000 000. The equipment could be financed by a loan from Standard Bank at 10% interest per annum. For tax purposes the equipment could be depreciated over 4 years using the 40:30:20:10 wear and tear allowed by the South African Revenue Service, after which it would be sold at its scrap value of R48 000.
Part of the cost of new equipment will be off-set by the proceed from sale of the old equipment.
Details of the current equipment are as follows:
Cost. R1 000 000
Resale value. R300 000
Useful life. 4 years
The equipment was purchased four years ago.
The company will also incur variable costs amounting to 0.067 of sales and fixed costs of R250 000 annually. The cost of capital is 12%.
The use of the new equipment will result in the following changes in net working capital:
Accruals. -R2000
Inventory. +R50 000
Accounts payable. +R40 000
Accounts receivable. +R70 000
Cash. +R5000
Notes payable. + R15000
Income and
Calculate the initial investment associated with the project and replacement of the new equipment.
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