Question $3$

$(25$ NivarKS$)$

Barbie Limited, a South African$-$based chocolate manufacturing company, intends to expand its output capacity in order to meet the expected increase in demand from the industry. The company plan is to acquire a new machine from China. They have the option to either lease or purchase the new machinery. The machinery has a cost of R$1000000.$

LEASE:

The company can lease the machinery under a three$-$year lease. They have to make a payment of R$600000$ at the end of each year. Barbie Limited has the option to buy the machinery at the end of the lease for R$279000$ and the financial manager intends on exercising this option. Insurance costs of R$15000$ are borne by the lessee.

BUY:

Alternatively, the company could finance the R$1000000$ cost of the machinery through its retained earnings, payable upfront. Barbie Limited will also pay an additional R$52000$ per year for insurance costs while the current running costs $($water and electricity$)$ for similar machines are R$62000$ per annum.

Insurance is expected to increase by $5\%$ per annum starting from year two. Due to improvements in the water supply and the use of renewable means of energy in the factory, running costs are expected to decrease at a rate of $10\%$ per annum starting from year two.

Depreciation is calculated using the straight$-$line method.

Assume that the current corporate tax rate is $30\%$ and the after$-$tax cost of debt is $11\%.$

Required:

You are required to:

$3\mathrm{.}1.$ Determine the after$-$tax cash flows and the net present value of the cash outflows under each

$(23$ Marks$)$ alternative.

$3\mathrm{.}2.$ Briefly indicate which alternative should be recommended

$(2$ Marks$)$

Question $4$

$(25$ Marks$)$

Case Study: Proposed Acquisition of Polo Limited by Chev Limited

Chev Limited, a software development company, is considering acquiring Polo Limited through a share exchange. The proposed merger is expected to generate economies of scale, resulting in an estimated additional value of R$95,000,000.$

As part of the agreement, the purchase consideration for the acquisition will be structured as a share exchange, with Chev Limited offering $1\mathrm{.}5$ of its own shares for every $1$ share held by shareholders of Polo Limited.

Key Financial Information:

$\backslash$table$[[$Company$,$Number of Shares,Price per Share,Earnings After Tax$],[$Chev Limited,$20,600,000,$R $38,R28,000,000$