Assignment 6;Accounting and finacial Management/ MANCOSA: POSTGRADUATE DIPLOMA IN BUSINESS MANAGEMENT 58
QUESTION 1 (15)
Shanghai Limited has the choice of purchasing one of two machines viz. machine P and machine Q. Both
machines have a five-year life with no residual value. The annual volume of production for both machines is
estimated at 300 000 units, which can be sold at R12 per unit.
Depreciation is calculated on the machine using the straight-line method.
Machine P costs R4 500 000. Its annual variable costs are estimated at R400 000 (excluding depreciation). Fixed
costs are estimated at R1 900 000.
Machine Q costs R4 800 000. Its variable costs are estimated at R360 000 (excluding depreciation). Fixed costs
are estimated at R1 800 000.
The cost of capital may be assumed at 14%.
Required:
1.1 Use the net present value method to determine and justify which machine should be selected by the
company. (10)
1.2 Calculate the accounting rate of return for machine P. (5)
Abridged Income Statement (internal use) 2015 2014
Sales units (thousands) 200 120
R’OOOs R’OOOs
Sales 18 000 12 000
Variable costs (all manufacturing) 9_QQQ m2
Contribution 9 000 5 000
Fixed Costs (80% manufacturing, 20% administration) 6_7_0_Q flop
Earnings before Interest and Tax 2 300 3 000
Interest M w
Earnings after Interest before Tax 850 2 500
Tax (30%) Q E
Earnings after Interest and Tax _5_9_5 1M
Abridged Statement of Financial Position 2015 2014
(Balance Sheet) R’OOOs R’OOOs
Fixed Assets 9 515 8 236
Current Assets 2 097 768
Inventory 445 250
Debtors 1 652 468
Cash 0 50
Total Assets 11 612 _9__Q_(_)_4
Equity and Liabilities
Ordinary share capital 3 000 3 000
Retained Income 4 007 3 412
Long Term Debt 1 735 1 634
Current Liabilities 2 870 958
Trade Creditors 1 350 958
Overdraft 1 520 0
Total Equity and Liabilities 11 612 9 004
58
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