Beautiful Ltd (Beautiful) is a cosmetic house which develops, manufactures and sells cosmetics and skincare products....

 

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Beautiful Ltd ("Beautiful") is a cosmetic house which develops, manufactures and sells cosmetics and skincare products. All products are divided and sold under the various product lines. Currently, Beautiful is considering to include a new skincare product line, "Revitalise", as one of their products. Revitalise is a skincare line which focuses on the older client base and mature skin. In order to manufacture Revitalise, Beautiful will have to purchase a new machine ("Machine X"). The machine has a cost price of R320 000 and will be depreciated over a period of 5 years according to the straight-line method. Machine X will also qualify for section 12C wear-and-tear deductions according to which 40% may be deducted in the first year and 20% each year thereafter. Beautiful will elect the straight-line method for the income tax deduction purpose. Machine X will be sold off after 4-years at which point it will have a residual value of R110 000. Machine X has an annual capacity to manufacture 50 000 units which will be fully utilised by Beautiful. As an alternative to Revitalise, Beautiful can opt to rather invest in a product line ("Glow") for teenage skins. Should Beautiful choose Glow, a second-hand manufacturing machine ("Machine Z") will be bought for R200 000. In line with Beautiful depreciation-policy for machinery, Machine Z will also be depreciated over 5 years on the straight-line method. A 20% per annum section 12C wear-and-tear deduction will apply according to which Beautiful will elect the straight-line method. At the end of 5 years, all the benefits for Machine Z ill have been obtained and Machine Z will have no sell-off or scrap value. During the 5 years of use, Machine Z will however be able to deliver 47 000 units per annum for Beautiful to meet the market demand. Below is the cost and selling prices of the two product lines: Revitalise Glow Cost price per unit R180 R75 Selling price per unit R200 R150 67 HEMN331-1-Jul-Dec2021-FA1-V3-ES-25052021 ANNEXURE F: FORMATIVE ASSESSMENT 1 For both product lines, the investment in working capital (which will be 12% of the annual sales) will take place at the beginning of the year and remain at this level for the years thereafter. Only at the end of the second last year of both product lines, will it be decreased to 7%. Assume that any remaining working capital balance will be recovered in the last year and will not affect the any tax charges. Currently, Beautiful's existing product lines are generating before-tax operating cash flows of R66million per annum which will be maintained in the future. Beautiful's cost of capital is 11.5%. Assume an income tax rate of 28% for companies. Required: Advise Beautiful Ltd whether they should invest in Revitalise or Glow by making use of the NPV analyses. (46 marks) Beautiful Ltd ("Beautiful") is a cosmetic house which develops, manufactures and sells cosmetics and skincare products. All products are divided and sold under the various product lines. Currently, Beautiful is considering to include a new skincare product line, "Revitalise", as one of their products. Revitalise is a skincare line which focuses on the older client base and mature skin. In order to manufacture Revitalise, Beautiful will have to purchase a new machine ("Machine X"). The machine has a cost price of R320 000 and will be depreciated over a period of 5 years according to the straight-line method. Machine X will also qualify for section 12C wear-and-tear deductions according to which 40% may be deducted in the first year and 20% each year thereafter. Beautiful will elect the straight-line method for the income tax deduction purpose. Machine X will be sold off after 4-years at which point it will have a residual value of R110 000. Machine X has an annual capacity to manufacture 50 000 units which will be fully utilised by Beautiful. As an alternative to Revitalise, Beautiful can opt to rather invest in a product line ("Glow") for teenage skins. Should Beautiful choose Glow, a second-hand manufacturing machine ("Machine Z") will be bought for R200 000. In line with Beautiful depreciation-policy for machinery, Machine Z will also be depreciated over 5 years on the straight-line method. A 20% per annum section 12C wear-and-tear deduction will apply according to which Beautiful will elect the straight-line method. At the end of 5 years, all the benefits for Machine Z ill have been obtained and Machine Z will have no sell-off or scrap value. During the 5 years of use, Machine Z will however be able to deliver 47 000 units per annum for Beautiful to meet the market demand. Below is the cost and selling prices of the two product lines: Revitalise Glow Cost price per unit R180 R75 Selling price per unit R200 R150 67 HEMN331-1-Jul-Dec2021-FA1-V3-ES-25052021 ANNEXURE F: FORMATIVE ASSESSMENT 1 For both product lines, the investment in working capital (which will be 12% of the annual sales) will take place at the beginning of the year and remain at this level for the years thereafter. Only at the end of the second last year of both product lines, will it be decreased to 7%. Assume that any remaining working capital balance will be recovered in the last year and will not affect the any tax charges. Currently, Beautiful's existing product lines are generating before-tax operating cash flows of R66million per annum which will be maintained in the future. Beautiful's cost of capital is 11.5%. Assume an income tax rate of 28% for companies. Required: Advise Beautiful Ltd whether they should invest in Revitalise or Glow by making use of the NPV analyses. (46 marks)

Answer rating: 100% (QA)

Present ValuePV of Cash Flow Cash Flow1iN idiscount rate Cost of Capital1150115 NYear of Cash Flow C... View the full answer