Class exercise

Investment Appraisal

Question one

Question two:

The accountant of ABC Ltd is in the process of evaluating a special two year project for the sale of
cricket bets to a sports complex. The sports complex is currently constructing its own factory for the
manufacturing of the bets and is looking for a supplier for the next two years when the factory will
be under construction. R2 000 has already been incurred as negotiation costs.

ABC Ltd will have to acquire a manufacturing plant at a cost of R80 000 with a four year’ useful life.
The plant will be disposed at a selling price of R48 000 at the end of two years because it will not be
used in the current operations of the company.

ABC Ltd will supply the sports complex with 4 000 cricket bets in the first year and 4 500 cricket bets
in the second year at R22 per bet. ABC Ltd expect the variable costs to be R12 per bet and fixed
costs of R8 000 p.a.
ABC Ltd is required to have R15 000 working capital at the beginning of the first year and R22 000 at
the beginning of the second year. This is recoverable at the end of the project.

The corporate tax rate is 28%. The weighted average cost of capital of the company is 12%

Required:

• Using NPV techniques, Should the project be accepted or rejected?