Tshabalala Enterprises is financed by R million longterm debt, R million preferred

shares, million ordinary shares and R million short term loans costing per year

The firm can raise debt by selling Rby value, coupon rate paid semiannually

year bonds at a discount of R and has to pay R in flotation cost. The firm can also

sell preferred shares with a par value of R at a discount of on par value and

has to pay R per share in flotation cost. The return on government bonds is currently

while the return on the market is The firms tax rate is and the ordinary shares

have a beta of

The company wants to buy a new machine for R million with installation costs of R

The existing machine can be sold today for R before taxes. It is years old,

cost R new, and has a remaining useful life of years. It is being depreciated

under the straight line method over an economic life of years. If held until the end of

years, the old machine would be basically worthless net of cleanup and removal costs

Over its year economic life, the new machine should reduce operating costs by R

per year, while being depreciated according to the straight line method. After years the

new machine can be sold for an estimated R If the new machine is acquired, the

following changes are needed in order to support operations: inventories increase by

R; cash increases by R; and accounts payable increases by R

Assume that the firm has adequate operating income against which to deduct possible

losses experienced on the sale of the existing machine. The firms tax rate is

Tshabalalas shares currently trade at R per share and a dividend of R per share has

just been paid. The long term growth rate in dividends of eight percent per year is expected

to continue in the near future.

REQUIRED

Do a complete capital budgeting analysis of the incremental cash flows resulting from the

replacement decision and calculate the NPV the Payback as well as the IRR. What is your

recommendation?