Question 3 15 Marks

Nashua is looking into the option of expanding its dyeing business. Business is booming, and Nashua is considering buying a new printer. Two printers are available on the market: printer X costs R60,000, requires R 6,000 per year to operate, and has a useful life of two years; printer Y costs R70,000, requires R8,000 per year to operate, and will need to be replaced every three years. Nashuas cost of capital is 10 percent.

Required:

3.1. What are the present values of the total costs of the two printers over their useful life? (4)

3.2. Why are the two present values not comparable? (4)

3.3. What is the annual-equivalent cost for each of the printers? (4)

3.4. Which printer should Nashua purchase? (3)

Question 4 10 Marks

Delafono is evaluating replacing an old pasta-making machine that is expected not to last more than two years. During that time, the machine is expected to generate a cash inflow of R20,000 per year. It could be replaced by a new machine at the cost of R150,000. The new machine is more efficient than the current machine, and as a result, it is expected to generate a net cash flow of R75,000 per year for three years. The management of Delafono is wondering whether to replace the old machine now or wait another year. Delafonos cost of capital is 10 percent.

Required:

4.1. Assume that the current resale value of the old machine is zero and that the new machine will also have a zero-resale value in the future. What is the annual equivalent cash flow of using the new machine? (5)

4.2. What should the management of Delafono do? Explain. (5