Faculty of Economics and Finance

Department of Finance and Investment

Module code: CFF206D
Semester Test 2
Date: 29 May 2023
Time: 120 minutes
Total marks of paper: 50 marks
Pages: 9
Internal examiners: Mr. KJ Zulu (examiner)
Mr. SW Sondzaba (Moderator)

Instructions:
 Answer all questions.
 Only non-programmable calculators are permitted.
 Round off per unit answers to four decimal places and final answer to nearest
rand
Question Topic Mark
Question 1 to 4 Capital budgeting and Time value of money 30
Question 5 and 6 Business Entities 20

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QUESTION 1 (8 marks; 19 minutes)
SHOW ALL FINANCIAL CALCULATOR FUNCTIONS
ROUND OFF FIGURES TO TWO DECIMAL PLACES

1. A firm is evaluating a proposal which has an initial investment of R35,000 and

has cash flows of R10,000 in year 1, R20,000 in year 2, and R10,000 in year 3. The
payback period of the project is

A) 1 year.
B) 2 years.
C) between 1 and 2 years.
D) between 2 and 3 years.

2. A firm is evaluating a proposal which has an initial investment of R50,000 and

has cash flows of R15,000 per year for five years. The payback period of the
project is

A) 1.5 years.
B) 2 years.
C) 3.3 years.
D) 4 years.

3. Should Tangshan Mining company accept a new project if its maximum

payback is 3.25 years and its initial after tax cost is R5,000,000 and it is expected
to provide after-tax operating cash inflows of R1,800,000 in year 1, R1,900,000 in
year 2, R700,000 in year 3 and R1,800,000 in year 4?
A) Yes.
B) No.
C) It depends.
D) None of the above.

4. Evaluate the following projects using the payback method assuming a rule of 3
years for payback.

Year Project A Project B

0 -10,000 -10,000
1 4,000 4,000
2 4,000 3,000
2
 3 4,000 2,000
4 0 1,000,000

A) Project A can be accepted because the payback period is 2.5 years but Project B
can not be accepted because it's payback period is longer than 3 years.
B) Project B should be accepted because even thought the payback period is 2.5
years for project A and 3.001 project B, there is a R1,000,000 payoff in the 4th
year in Project B.
C) Project B should be accepted because you get more money paid back in the
long run.
D) Both projects can be accepted because the payback is less than 3 years.

5. What is the NPV for the following project if its cost of capital is 15 percent and
its initial after tax cost is R5,000,000 and it is expected to provide after-tax
operating cash inflows of R1,800,000 in year 1, R1,900,000 in year 2, R1,700,000
in year 3 and R1,300,000 in year 4?

A) R1,700,000
B) R371,764
C) (R137,053)
D) None of the above

6. What is the IRR for the following project if its initial after tax cost is R5,000,000
and it is expected to provide after-tax operating cash inflows of R1,800,000 in year
1, R1,900,000 in year 2, R1,700,000 in year 3 and R1,300,000 in year 4?

A) 15.57%
B) 0.00%
C) 13.57%
D) None of the above

7. A firm with a cost of capital of 13 percent is evaluating three capital projects.

The internal rates of return are as follows:

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The firm should
A) accept Project 2 and reject Projects 1 and 3.
B) accept Projects 2 and 3 and reject Project 1.
C) accept Project 1 and reject Projects 2 and 3.
D) accept Project 3 and reject Projects 1 and 2.

8. Which capital budgeting method is most useful for evaluating the following
project? The project has an initial after tax cost of R5,000,000 and it is expected to
provide after-tax operating cash flows of R1,800,000 in year 1, (R2,900,000) in
year 2, R2,700,000 in year 3 and R2,300,000 in year 4?

A) NPV.
B) IRR.
C) Payback.
D) Two of the above.

QUESTION 2 (7 marks; 17 minutes)

SHOW ALL FINANCIAL CALCULATOR FUNCTIONS
ROUND OFF FIGURES TO TWO DECIMAL PLACES

Woolworths Ltd, is evaluating the feasibility of investing R1.000, 000 in a new

store in Mbumbulu, having a 5 year life. The firm has estimated the cash inflows
from the proposed store, as shown in the following table. The firm has an 8% cost
of capital.

Year(t) Cash Inflows (CFt)

1 R 100, 000
2 R200, 000

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 3 R300, 000
4 R400, 000
5 R500,000

Required:
1. Calculate the payback period for the proposed investment (1)
2. Calculate the net present value (NPV) for the proposed investment using
table factors (6)

QUESTION 3 (10 marks; 24 minutes)

SHOW ALL FINANCIAL CALCULATOR FUNCTIONS
ROUND OFF FIGURES TO TWO DECIMAL PLACES

Rainbow Energy Ltd. is considering an investment in one of two mutually

exclusive projects: either a project involving solar panels over 5 hectares of land in
the Northern Cape (Project NCS) or investing in wind turbines at a Port Elizabeth
wind farm (project PEWF) to generate electricity.
The capital expenditure department has made the following estimates:
Project NCS Project PEWF
Initial investment R64 500 000 R55 000 000
Cash flow year 1 R14 000 000 R13 750 000
Cash flow year 2 R16 000 000 R14 750 000
Cash flow year 3 R18 000 000 R15 750 000
Cash flow year 4 R18 000 000 R16 250 000
Cash flow year 5 R12 000 000 R12 500 000

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 Required:
1. Evaluate the above-mentioned capital projects and recommend which one of the
two would contribute the greatest value to the firm using the NPV, the PI and
IRR techniques. Given 6% cost of capita (required rate of return).

QUESTION 4 (5 marks; 12 minutes)

SHOW ALL FINANCIAL CALCULATOR FUNCTIONS
ROUND OFF FIGURES TO TWO DECIMAL PLACES

Mr Zulu borrowed R500 000 from his bank to finance his car for 5 years earning
12.5% per annum. Prepare amortization table that shows all annual balances and
payments from Mr Zulu.

QUESTION 5 (9 marks; 22 minutes)

SHOW ALL FINANCIAL CALCULATOR FUNCTIONS
ROUND OFF FIGURES TO TWO DECIMAL PLACES

Discuss the comparison of business entities using the given table below:
Issue Sole proprietor Partnership Company
Eg: ownership 1 man business 2 to 20 partners Unlimited Share holders
Tax Implication
Who owns the assets
Liability for business debts

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 QUESTION 6 (11 marks; 26 minutes)
SHOW ALL FINANCIAL CALCULATOR FUNCTIONS
ROUND OFF FIGURES TO TWO DECIMAL PLACES

PRO-JTS (Pty) Ltd is an SBC in terms of section 12E. The company manufactures
and supplies goods to TUT and other institutions. The company income and
expenditure are as follows:
R
Gross Profit from goods supplied 5 000 000
interest income 800 000
Purchase of machine for manufacturing process
immediately brought into use 1 000 000
Office equipment bought 400 000
Required:
1. In terms of section 12E of Income Tax Act, name all the requirements
needed to qualify as a small business corporation.
2. Calculate the SBC Tax Calculations for PRO-JTS using the SBC table
below.
Taxable Income Rate of Tax

Not exceeding R73 650 nil

R73651 to R365 650 7% of the amount exceeding R73 650

R365 001 to R550 000 R20 395 plus 21% of amount exceeding R365 650

R550 001 + R59 245 plus 28% of amount exceeding R550 000

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