Management Accounting $3[$M $2]$

Question $2$

Capital Budgeting

$\backslash$table$[[$EXAMINECIAL$,2019]]$

$(25$ Marks: $45$ Minutes$)$

The manufacturing division of Defy Ltd is using a cutting machine $P_{21}1$ to make one of its products. This division is expecting a large increase in demand for the product and desperately wants to expand its productive capacity. The division wants to standby. The cutting XP$42$ is a high$-$speed unit with double the capacity of the cutting XP$21$

The XP$42$ machine has a $4$ year life expectancy from the time of production start. The scrap value is negligible and straight$-$line depreciation is used to zero. However, cutting XP$21$ can be sold at the end of year $4$ at value of R$140000($Book Value R$112000).$ The cutting XP$42$ machine costs R$240000.$ Production over the next $4$ years is expected to be:

Year $1-40000$ units

Year $2-60000$ units

Year $3-80000$ units

Year $4-90000$ units

The variable costs of the machine are as follows:

XP$42$

$\backslash$table$[[$Materials per unit,R $0\mathrm{.}40],[$Labour per unit,R $0\mathrm{.}16],[$Spares and lubricants,$R{0\mathrm{.}04}_{?}$