Question 2 You have R500 000 extra cash to invest. You have two investment options (a)...

  

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Question 2 You have R500 000 extra cash to invest. You have two investment options (a) Invest R500 000 in a fixed deposit account and earn monthly interest on the fixed deposit account which is compounded monthly. After the six years the value of your initial investment and interest will be R908797. (b) Buy a small glass bottle cleaning plant for R500 000. The plant receives dirty glass cooldrink bottles, cleans them and return them to the cooldrink manufacturer. You did some homework and made the following projection for your plant operating expenses and revenue. The maximum amount of bottles that the plant can process is 10 000 per month. Year 1 Year 2 Year 3 Year 4 and thereafter Bottles Received [Number of bottles/ month] 5000 6000 7500 10000 Cleaning Cost [R/bottle] 1.50 Return Price Received per bottle [R/bottle] 3.50 Fixed Plant Costs [R/ year] 50000 The cleaning cost per bottle and the returned price per bottle will increase with 3% per year after year 1. The fixed plant operating costs per annum increase by 5% per year after year 1. o The plant has a salvage value of R80 000 after 6 years of operation and depreciation is calculated using the straight-line method. o The tax rate is 28%. For you to even consider this option, you want to earn a return on investment at least 20% higher than you will get by saving your money in the bank in a fixed deposit. You can borrow money at 18% and invest money at 15%. Which investment option will you choose? [22] Question 2 You have R500 000 extra cash to invest. You have two investment options (a) Invest R500 000 in a fixed deposit account and earn monthly interest on the fixed deposit account which is compounded monthly. After the six years the value of your initial investment and interest will be R908797. (b) Buy a small glass bottle cleaning plant for R500 000. The plant receives dirty glass cooldrink bottles, cleans them and return them to the cooldrink manufacturer. You did some homework and made the following projection for your plant operating expenses and revenue. The maximum amount of bottles that the plant can process is 10 000 per month. Year 1 Year 2 Year 3 Year 4 and thereafter Bottles Received [Number of bottles/ month] 5000 6000 7500 10000 Cleaning Cost [R/bottle] 1.50 Return Price Received per bottle [R/bottle] 3.50 Fixed Plant Costs [R/ year] 50000 The cleaning cost per bottle and the returned price per bottle will increase with 3% per year after year 1. The fixed plant operating costs per annum increase by 5% per year after year 1. o The plant has a salvage value of R80 000 after 6 years of operation and depreciation is calculated using the straight-line method. o The tax rate is 28%. For you to even consider this option, you want to earn a return on investment at least 20% higher than you will get by saving your money in the bank in a fixed deposit. You can borrow money at 18% and invest money at 15%. Which investment option will you choose? [22]

Answer rating: 100% (QA)

Solution Using Capital Budegting technique Two proposals are evaluated in the light of the Net Present values NPV of cash Inflows and Cash Outflows Following Table shows the calculation of NPV for two ... View the full answer