Reference no: EM132785775
Problem - Company A has a machine, details of which are as follows:
|
Details
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Rand
|
|
Rand
|
|
Cost
|
3,500,000
|
Tax Value
|
1,600,000
|
|
Realisable Value
|
2,000,000
|
Book Value
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1,800,000
|
It produces widgets on this machine. The output and costs are as follows:
Output per annum: 5400 units
Variable cost per unit: R 400
Fixed cost per annum (including depreciation): R600,000
The selling price of a widget is R 800. The machine is operating at full capacity. The company has the opportunity of replacing the machine with a second-hand machine of larger capacity, at a cost of R 3,000,000. This machine will result in a variable cost of R350 per unit and fixed costs of R 900,000 per annum (including depreciation).
Both machines will have a remaining useful life of 5 years and the book and tax values will be written off on a straight-line basis over this period. They will have no residual value.
Required - Calculate the output required of the replacement machine to make an investment in it worthwhile. The company uses discounted cash flow to evaluate such proposals and uses a rate of 10% after tax. Note that the rate of corporate tax is expected to be 28% throughout the period.