Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Leeds Limited is looking to expand its operations and increase its market share in the cell phone industry. To achieve this, 
they are looking to increase its current productive capacity of 100 000 cell phones a year by at least 6% for each of the 
next 5 years. It is considering two cell phone making machines and is unsure which to purchase: 
Cell Phone Machine ABC:
Cell Phone Machine ABC can be imported at a landed purchase cost of R160 000 and a further R20 000 transport and 
installation costs will have to be incurred to get it ready for production. This machine is expected to last 5 years after which 
it will be sold at its scrap value of R20 000. Net cash flow from the sale of the additional production is expected to be 
R58 000, R63 000, R68 000, R72 000 and R51 000 respectively over the 5-year lifespan of the machine. This machine 
will enable Leeds Limited to achieve a 4% increase in productive capacity.
Cell Phone Machine XYZ:
Cell Phone Machine XYZ can be purchased locally for R190 000 and will also have a useful life of 5 years. It will not have 
any resale value at the end of the 5 years and will be disposed of. Net cash inflows from additional production will amount 
to R62 000 per annum for each of the five years. This machine will enable Leeds Limited to achieve a 2% increase in 
productive capacity.
Additional information:
• Leeds Limited requires a return on capital of 12% for all investments made. The depreciation policy is to 
depreciate all non- current assets on a straight-line basis. Assume that all cash flows occur at the end of each 
financial year except for the initial investment which occurs in period 0.
• The capital expenditure committee has indicated that R370 000 is available for this capital expenditure. In terms 
of the company’s capital expenditure policy, only projects with a payback period of less than four years are 
accepted.
REQUIRED
You are the financial manager at Leeds Limited and have been asked by the Board of Directors to advise them on which 
machine/s to authorise for purchase. Using appropriate capital budgeting techniques which must include the Payback 
Period, Net Present Value and Accounting Rate of Return results to compile a report to the Board of Directors detailing 
the option that should be chosen.

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