The management of Redbus Rapid Transit System (RRT) has decided to purchase a new ticket- sales...

 

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The management of Redbus Rapid Transit System (RRT) has decided to purchase a new ticket- sales machine. This new machine is expected to provide a high quality and affordable way of generating tickets for customers. The market research that was conducted by an independent agency that charged a fee of R20 000 also determined that there is a demand from customers for generating tickets in this manner. The new machine is expected to generate the number of tickets as shown in Table 1.1 for the next five years. Table 1.1: Number of tickets Year Number of tickets sold 1234 110 000 140 000 148 000 160 000 190 000 The total installed costs of the new machine amounts to R2 000 000. The new machine will need an increase in inventory levels of R300 000 and RRT will have to acquire an overdraft facility of R140 000 to cover unexpected expenses. Interest on the overdraft facility will amount to R29 000 per year. The total fixed costs are R50 000 per year, the variable costs are R15 per ticket and the tickets are sold at R80 per ticket for the month. The ticket machine is to be depreciated according to the straight line method over five years. The ticket machine can be sold for 27 per cent of its initial installed costs and the removal costs will amount to R20 000. The cost of capital is 14 per cent. The company tax rate is 27 per cent. REQUIRED: 1.1 Calculate the initial investment amount for the new machine. (4 marks) 1.2 Calculate the estimated net cash flow of the project for year 1 to 5. (40 marks) 1.3 Calculate the expected terminal cash flow of the project. (6 marks) 1.4 Calculate the net present value (NPV) and the internal rate of return (IRR) for the project. Remember to include your above calculations. (6 marks) 1.5 Explain whether RRT should purchase the new machine based on your NPV and IRR answers. Motivate your answer. (4 marks) [60 Marks] The management of Redbus Rapid Transit System (RRT) has decided to purchase a new ticket- sales machine. This new machine is expected to provide a high quality and affordable way of generating tickets for customers. The market research that was conducted by an independent agency that charged a fee of R20 000 also determined that there is a demand from customers for generating tickets in this manner. The new machine is expected to generate the number of tickets as shown in Table 1.1 for the next five years. Table 1.1: Number of tickets Year Number of tickets sold 1234 110 000 140 000 148 000 160 000 190 000 The total installed costs of the new machine amounts to R2 000 000. The new machine will need an increase in inventory levels of R300 000 and RRT will have to acquire an overdraft facility of R140 000 to cover unexpected expenses. Interest on the overdraft facility will amount to R29 000 per year. The total fixed costs are R50 000 per year, the variable costs are R15 per ticket and the tickets are sold at R80 per ticket for the month. The ticket machine is to be depreciated according to the straight line method over five years. The ticket machine can be sold for 27 per cent of its initial installed costs and the removal costs will amount to R20 000. The cost of capital is 14 per cent. The company tax rate is 27 per cent. REQUIRED: 1.1 Calculate the initial investment amount for the new machine. (4 marks) 1.2 Calculate the estimated net cash flow of the project for year 1 to 5. (40 marks) 1.3 Calculate the expected terminal cash flow of the project. (6 marks) 1.4 Calculate the net present value (NPV) and the internal rate of return (IRR) for the project. Remember to include your above calculations. (6 marks) 1.5 Explain whether RRT should purchase the new machine based on your NPV and IRR answers. Motivate your answer. (4 marks) [60 Marks]

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To answer the provided questions lets calculate the required values step by step 11 Calculate the initial investment amount for the new machine The initial investment amount includes the total install... View the full answer