Lubners Limited operates transport division which offers long haul transport. It has a fleet of trucks which are replaced as the maintenance costs become excessive. One of the trucks needs replacing and Lubners Limited is considering the following purchase: 2
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Lubners Limited operates transport division which offers long haul transport. It has a fleet of trucks which are replaced
as the maintenance costs become excessive. One of the trucks needs replacing and Lubners Limited is considering the
following purchase:
2
A Volvo F1350 which costs R1 500 000 for the horse and a further R500 000 for a custom made trailer. This truck will
have a useful life of five years after which it will be sold for 10% of its total purchase cost.
The first alternative is to use this purchase in normal operations in which customers are charged per kilometre
transported and the expected net cash revenue in the first year is expected to be R460 000 and this is expected to
increase by 10% every year.
A second alternative is to use this purchase for a long term contract with an established client. This contract is for a
period of five years with annual cash revenues of R580 000 for each of the five years.
It is company policy to depreciate vehicles over its useful life on a straight line basis and the cost of capital used to
evaluate capital projects is 12%.
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- Epica PLC is considering marketing a new product with a four-year life. Epica will need to install new equipment to manufacture the product. Epica has to choose between two machines both of which would be suitable. Machine 1 costs K460,000 to purchase and install, and will have a residual value of K20,000 at the end of four years. Machine 2 costs K630,000 to purchase and install, and has a residual value of K30,000 at the end of four years. Machine 2 takes slightly longer to install and commission, but once in operation it has slightly lower operating costs per unit, and will eventually produce more output. The following projections have been prepared of the cash flows from product sales and operating costs for the two machines: Machine 1 Machine 2 SalesK’000 Costs K’000 Sales K’000 Costs K’000 Year 1 1,340 1,160 700 610 Year 2 1,460 1,260 1,400 1,100 Year 3 1,300 1,140 1,600 1,240 Year 4 820 760 900 750 The company’s cost of…Worldwide Limited is involved in transportation and distribution. The company is considering purchasing a new delivery lorry. The new lorry will reduce annual rental expenses by RM100,000. Two latest models “Super Rider” and “Rough Rider” are available in the market. The information relating to these two models is given: Super Rider Rough Rider Purchase Price RM200,000 RM230,000 Operating costs per year RM15,000 RM20,000 Overhauling costs in year 3 RM12,000 - Overhauling costs in year 4 - RM14,000 Salvage value RM20,000 RM30,000 Useful life 5 years 5 years The company has decided to capitalize overhauling expenses and include them as part of the cost of the lorry in the year it is incurred. The company use staright line method to depreciate its vehicles. The corporate tax rate is 25%. The firm costs of capital is 15%. Required: Calculate the initial outlayEpica PLC is considering marketing a new product with a four-year life. Epica will needto install new equipment to manufacture the product. Epica has to choose between twomachines both of which would be suitable.Machine 1 costs K460,000 to purchase and install, and will have a residual value ofK20,000 at the end of four years. Machine 2 costs K630,000 to purchase and install, andhas a residual value of K30,000 at the end of four years. Machine 2 takes slightly longerto install and commission, but once in operation it has slightly lower operating costs perunit, and will eventually produce more output.The following projections have been prepared of the cash flows from product sales andoperating costs for the two machines:Machine 1 Machine 2Sales K’000 Costs K’000 Sales K’000 Costs K’000Year 1 1,340 1,160 700 610Year 2 1,460 1,260 1,400 1,100Year 3 1,300 1,140 1,600 1,240Year 4 820 760 900 750The company’s cost of capital is 12% p.a. All capital investments have to achieve apayback period…
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