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During 2022 the management of Capri Limited considered the acquisition a new machine for purchase and installation during the second quarter of 2024 with a desired rate of return of 15%. The machine will cost R6 000 000 excluding import duties of R250 000 and will have a useful life of five years. The machine is expected to increase cash inflows by R2 000 000 per year but cash expenses will increase by R300 000 per year.  Refer to the proposed acquisition of a new machine for purchase and installation during the second quarter of 2024 and answer the following questions: Calculate the Payback Period (expressed in years, months and days) Calculate the Accounting Rate of Return on initial investment (expressed to two decimal places). Calculate the Internal Rate of Return (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. Calculate the Net Present Value if the machine is expected to have a scrap value of R300 000. Suppose Capri Ltd funds the purchase of the new machine through the issue of 12% preference shares that are expected to sell for R10 each. If the floatation costs are estimated at R1 per share, calculate the cost of the preference shares (expressed to two decimal places). Suppose Capri Ltd funds the purchase of the new machine through the issue of ordinary shares. Assume that the present value of an ordinary share of Capri Ltd is R17.25, the next projected dividend is R1.80 per share and the expected growth rate in dividends is 15% p.a. Use the Gordon Growth Model to estimate the cost of the ordinary shares (expressed to two decimal places).

During 2022 the management of Capri Limited considered the acquisition a new machine for purchase and installation during the second quarter of 2024 with a desired rate of return of 15%. The machine will cost R6 000 000 excluding import duties of R250 000 and will have a useful life of five years. The machine is expected to increase cash inflows by R2 000 000 per year but cash expenses will increase by R300 000 per year.  Refer to the proposed acquisition of a new machine for purchase and installation during the second quarter of 2024 and answer the following questions: Calculate the Payback Period (expressed in years, months and days) Calculate the Accounting Rate of Return on initial investment (expressed to two decimal places). Calculate the Internal Rate of Return (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. Calculate the Net Present Value if the machine is expected to have a scrap value of R300 000. Suppose Capri Ltd funds the purchase of the new machine through the issue of 12% preference shares that are expected to sell for R10 each. If the floatation costs are estimated at R1 per share, calculate the cost of the preference shares (expressed to two decimal places). Suppose Capri Ltd funds the purchase of the new machine through the issue of ordinary shares. Assume that the present value of an ordinary share of Capri Ltd is R17.25, the next projected dividend is R1.80 per share and the expected growth rate in dividends is 15% p.a. Use the Gordon Growth Model to estimate the cost of the ordinary shares (expressed to two decimal places).

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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During 2022 the management of Capri Limited considered the acquisition a new machine for purchase and installation during the second quarter of 2024 with a desired rate of return of 15%. The machine will cost R6 000 000 excluding import duties of R250 000 and will have a useful life of five years. The machine is expected to increase cash inflows by R2 000 000 per year but cash expenses will increase by R300 000 per year. 

Refer to the proposed acquisition of a new machine for purchase and installation during the second quarter of 2024 and answer the following questions:

  1. Calculate the Payback Period (expressed in years, months and days)
  2. Calculate the Accounting Rate of Return on initial investment (expressed to two decimal places).
  3. Calculate the Internal Rate of Return (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation.
  4. Calculate the Net Present Value if the machine is expected to have a scrap value of R300 000.
  5. Suppose Capri Ltd funds the purchase of the new machine through the issue of 12% preference shares that are expected to sell for R10 each. If the floatation costs are estimated at R1 per share, calculate the cost of the preference shares (expressed to two decimal places).
  6. Suppose Capri Ltd funds the purchase of the new machine through the issue of ordinary shares. Assume that the present value of an ordinary share of Capri Ltd is R17.25, the next projected dividend is R1.80 per share and the expected growth rate in dividends is 15% p.a. Use the Gordon Growth Model to estimate the cost of the ordinary shares (expressed to two decimal places).
CAPRI LIMITED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2022 Sales Cost of sales Gross profit Operating expenses Operating profit Interest expense Interest income Profit before tax Company tax Profit after tax R 8 400 000 (5 304 000) 3 096 000 (1 596 000) 1 500 000 (324 000) 120 000 1 296 000 (390 000) 906 000 In addition to the above, the following information is available: Interim dividends paid in 2022 amounted to R456 000. 511 800 shares were in issue during 2022. The market price per share was R17.25 on 31 December 2022. During 2022 the management of Capri Limited considered the acquisition a new machine for purchase and installation during the second quarter of 2024 with a desired rate of return of 15%. The machine will cost R6 000 000 excluding import duties of R250 000 and will have a useful life of five years. The machine is expected to increase cash inflows by R2 000 000 per year but cash expenses will increase by R300 000 per year. Depreciation is calculated using the straight-line method. At the end of December 2022 the company was approached by a group of previously disadvantaged women who had opened a service station on 01 July 2022, selling only diesel. They needed assistance in improving the financial performance of the service station. Diesel was sold at R16 per litre and the variable costs totalled R14 per litre. The fixed costs were R135 000 per month. After six months of opening, the sales achieved was 540 000 litres and the sales were almost the same each month. To improve the performance, the Capri Limited considered the following proposals:
Transcribed Image Text:CAPRI LIMITED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2022 Sales Cost of sales Gross profit Operating expenses Operating profit Interest expense Interest income Profit before tax Company tax Profit after tax R 8 400 000 (5 304 000) 3 096 000 (1 596 000) 1 500 000 (324 000) 120 000 1 296 000 (390 000) 906 000 In addition to the above, the following information is available: Interim dividends paid in 2022 amounted to R456 000. 511 800 shares were in issue during 2022. The market price per share was R17.25 on 31 December 2022. During 2022 the management of Capri Limited considered the acquisition a new machine for purchase and installation during the second quarter of 2024 with a desired rate of return of 15%. The machine will cost R6 000 000 excluding import duties of R250 000 and will have a useful life of five years. The machine is expected to increase cash inflows by R2 000 000 per year but cash expenses will increase by R300 000 per year. Depreciation is calculated using the straight-line method. At the end of December 2022 the company was approached by a group of previously disadvantaged women who had opened a service station on 01 July 2022, selling only diesel. They needed assistance in improving the financial performance of the service station. Diesel was sold at R16 per litre and the variable costs totalled R14 per litre. The fixed costs were R135 000 per month. After six months of opening, the sales achieved was 540 000 litres and the sales were almost the same each month. To improve the performance, the Capri Limited considered the following proposals:
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