Financial Questions

Net Present Value Technique

Calculate the Payback Period of Machine Ati (answer expressed in years, months and days).Use the Net Present Value technique to determine the machine that should be selected by the Nika Limited.Calculate the Accounting Rate of Return of Machine Ati (answer expressed to two decimal places).

Nika Limited has the choice of purchasing one of two machines viz. Machine Ati or Machine Ude. Both machines have a five-year life. The annual revenues from each machine are estimated at $2 000 000.

Machine Ati costs $4 500 000. Its annual cash operating costs are estimated at $680 000. Machine Ati is not expected to have a scrap value.

Machine Ude costs $4 500 000. Its annual cash operating costs are estimated at $700 000. The scrap value of this machine is estimated to be $200 000. Depreciation amounts to $900 000 per year for Machine Ati and $860 000 for Machine Ude. The cost of capital may be assumed to be 14%.

1.4 Calculate the project’s Internal Rate of Return (IRR). (Round off your answer to two decimal places. (5)

The owner of Ongwedi Enterprises was approached by a local dealer in air conditioning units. The dealer proposed replacing the old cooling system of Ongwedi Enterprises with a modern, more efficient system. The cost of the new system was quoted at $300 000, but it would save $62 000 per year in electricity costs. The estimated life of the new system is 10 years, with no salvage value expected. All capital projects are required to earn at least the firm’s cost of capital, which is 12%.

2.1 Study the information given below and advise Noda Enterprises whether they should accept the special order or not. Motivate your answer with the relevant calculations. (5)

Noda Enterprises manufactures and sells study guides for learners at schools. The selling price of each study guide is $120. The company’s current output is 6 000 units per month, which represents 75% of the company’s production capacity of 8 000 units. The Gauteng Department of Education offered to buy 2 000 study guides as a special order at $70 each to provide to indigent learners. Fixed costs for the month amount to $210 000 and variable costs amount to $366 000.

3.1 How many units must be sold in order to break even

3.2 Calculate the margin of safety as a percentage. 

3.3 Determine the sales quantity required in order to achieve the company’s profit objective of $1 800 000. 

3.4 Calculate the total Contribution Margin and Net Profit/Loss, if the sales volume is 5% less than expected. 

3.5 Suppose the marketing manager proposes that the selling price be increased to $198 per unit. Calculate the amount by which fixed costs must decrease in order to achieve the company’s profit objective of $1 800 000, if 50 000 units are sold. (4)

Agta Enterprises manufactures a product that sells for $180 each. The company presently produces and sells 50 000 units per year. Unit variable manufacturing and selling expenses are $90 and $18 respectively. Annual fixed costs are $2 200 000 for manufacturing overheads and

$1 040 000 for selling and administrative activities.

Calculate and comment on the following ratios (where applicable round off answers to two decimal places):

4.1.1 Gross margin (3)

4.1.2 Current ratio (3)

4.1.3 Acid-test ratio (4)

4.1.4 Debtors collection period (3)

4.1.5 Inventory turnover (4)

4.1.6 Return on assets (3)

Caht Enterprises

Extract from the Statement of Comprehensive Income for the year ended 31 March 2019: