Question 1: Capital expenditure decisionDiana Fashions Ltd manufactures dance and exercise clothing. It is considering replacing an existing machine with a more advanced model. Details of the existing and proposed machines are:The existing machine was bought two years ago and cost $100,000. At thattime its economic life was assessed at five years. Consequently, the remaining depreciation was claimed in the first three years of operations. It has a current market value of $105,000. Its current book value is $45,000.The new machine will cost $150,000 and will incur installation costs of $20,000. It has an expected useful life of five years.Inland Revenue has approved the following depreciation rates (on cost) for machines of this type:Year Rate (%)1 252 303 204 155 10Earnings before depreciation and taxes are expected to be:Year Existing machine Proposed machine $ $1 160,000 170,0002 150,000 170,0003 140,000 170,0004 140,000 170,0005 140,000 170,000The company’s tax rate is 28%, and it requires a 15% rate of return on its investments (assuming capital gains are not taxed).(a) Calculate:(i) The net investment outlay.(ii) Annual operating net cash flows for the new (proposed) and old (present) machines.Hints:Please see the worked example (Powell Corporation) in Chapter 8 of your Gitman set text – Tables 8.2, 8.6, 8.7 and 8.8.Also see pages 357–358 of Gitman and pages 143–145 of Module 4 in your learning guide for examples of how to calculate the initial investment.(b) Calculate:(i) The accounting rate of return (ARR) using the average net profit after tax as the proxy for the average annual profits. (ii) The payback period.(iii) The net present value of the proposal. Hints:For ARR, see the examples on pages 407–408 of Gitman. For payback period, see the example on page 150 of Module 4 in your learning guide.(c) Should the project be accepted? Give reasons. Question 2: Valuation of bondsYou have $20,000 available for investment purposes, and are considering investing in either Bond A or Bond B. Both bonds have a face value of $1,000, five years to run until maturity, and give a yield to maturity of 12%.The coupon interest rate on Bond A is 6% per annum and that on Bond B is 14% per annum.(a) Calculate the selling price of each bond.(b) How many units of each bond (including fractions) could you buy for $20,000? (Answer to three decimal places.)(c) What would be the annual interest income on each of the options calculated in (b)? (Again, use fractions of units to three decimal places.)(d) Assume you can reinvest the interest income as it is received (at the end of each year) at 10% per annum. Calculate the total (face) value of the bond principal plus interest reinvested for your bond A and bond B total investment. (Again, use fractions of units to three decimal places.)Hint:We are reinvesting the interest and thus need the future value of these deposits, plus the future (face) value of the bond at year 5.You need to use the answers derived in (b) and (c) above to calculate separately the total reinvested interests and the future value of bond A and Bond B.(e) Why are the two values calculated in (d) different? If you are concerned that you will earn less than the 12% yield to maturity, which bond would be the better choice? Show calculations of yields to maturity to support your answer.Hint: Use the approximate formula as shown in Module 2 in the learning guide.

Question 1: Capital expenditure decisionDiana Fashions Ltd manufactures dance and exercise clothing. It is considering replacing an existing machine with a more advanced model. Details of the existing and proposed machines are:The existing machine was bought two years ago and cost $100,000. At thattime its economic life was assessed at five years. Consequently, the remaining depreciation was claimed in the first three years of operations. It has a current market value of $105,000. Its current book value is $45,000.The new machine will cost $150,000 and will incur installation costs of $20,000. It has an expected useful life of five years.Inland Revenue has approved the following depreciation rates (on cost) for machines of this type:Year Rate (%)1 252 303 204 155 10Earnings before depreciation and taxes are expected to be:Year Existing machine Proposed machine $ $1 160,000 170,0002 150,000 170,0003 140,000 170,0004 140,000 170,0005 140,000 170,000The company’s tax rate is 28%, and it requires a 15% rate of return on its investments (assuming capital gains are not taxed).(a) Calculate:(i) The net investment outlay.(ii) Annual operating net cash flows for the new (proposed) and old (present) machines.Hints:Please see the worked example (Powell Corporation) in Chapter 8 of your Gitman set text – Tables 8.2, 8.6, 8.7 and 8.8.Also see pages 357–358 of Gitman and pages 143–145 of Module 4 in your learning guide for examples of how to calculate the initial investment.(b) Calculate:(i) The accounting rate of return (ARR) using the average net profit after tax as the proxy for the average annual profits. (ii) The payback period.(iii) The net present value of the proposal. Hints:For ARR, see the examples on pages 407–408 of Gitman. For payback period, see the example on page 150 of Module 4 in your learning guide.(c) Should the project be accepted? Give reasons. Question 2: Valuation of bondsYou have $20,000 available for investment purposes, and are considering investing in either Bond A or Bond B. Both bonds have a face value of $1,000, five years to run until maturity, and give a yield to maturity of 12%.The coupon interest rate on Bond A is 6% per annum and that on Bond B is 14% per annum.(a) Calculate the selling price of each bond.(b) How many units of each bond (including fractions) could you buy for $20,000? (Answer to three decimal places.)(c) What would be the annual interest income on each of the options calculated in (b)? (Again, use fractions of units to three decimal places.)(d) Assume you can reinvest the interest income as it is received (at the end of each year) at 10% per annum. Calculate the total (face) value of the bond principal plus interest reinvested for your bond A and bond B total investment. (Again, use fractions of units to three decimal places.)Hint:We are reinvesting the interest and thus need the future value of these deposits, plus the future (face) value of the bond at year 5.You need to use the answers derived in (b) and (c) above to calculate separately the total reinvested interests and the future value of bond A and Bond B.(e) Why are the two values calculated in (d) different? If you are concerned that you will earn less than the 12% yield to maturity, which bond would be the better choice? Show calculations of yields to maturity to support your answer.Hint: Use the approximate formula as shown in Module 2 in the learning guide.

Question 1: Capital expenditure decisionDiana Fashions Ltd manufactures dance and exercise clothing. It is considering replacing an existing machine with a more advanced model. Details of the existing and proposed machines are:The existing machine was bought two years ago and cost $100,000. At thattime its economic life was assessed at five years. Consequently, the remaining depreciation was claimed in the first three years of operations. It has a current market value of $105,000. Its current book value is $45,000.The new machine will cost $150,000 and will incur installation costs of $20,000. It has an expected useful life of five years.Inland Revenue has approved the following depreciation rates (on cost) for machines of this type:Year Rate (%)1 252 303 204 155 10Earnings before depreciation and taxes are expected to be:Year Existing machine Proposed machine $ $1 160,000 170,0002 150,000 170,0003 140,000 170,0004 140,000 170,0005 140,000 170,000The company’s tax rate is 28%, and it requires a 15% rate of return on its investments (assuming capital gains are not taxed).(a) Calculate:(i) The net investment outlay.(ii) Annual operating net cash flows for the new (proposed) and old (present) machines.Hints:Please see the worked example (Powell Corporation) in Chapter 8 of your Gitman set text – Tables 8.2, 8.6, 8.7 and 8.8.Also see pages 357–358 of Gitman and pages 143–145 of Module 4 in your learning guide for examples of how to calculate the initial investment.(b) Calculate:(i) The accounting rate of return (ARR) using the average net profit after tax as the proxy for the average annual profits. (ii) The payback period.(iii) The net present value of the proposal. Hints:For ARR, see the examples on pages 407–408 of Gitman. For payback period, see the example on page 150 of Module 4 in your learning guide.(c) Should the project be accepted? Give reasons. Question 2: Valuation of bondsYou have $20,000 available for investment purposes, and are considering investing in either Bond A or Bond B. Both bonds have a face value of $1,000, five years to run until maturity, and give a yield to maturity of 12%.The coupon interest rate on Bond A is 6% per annum and that on Bond B is 14% per annum.(a) Calculate the selling price of each bond.(b) How many units of each bond (including fractions) could you buy for $20,000? (Answer to three decimal places.)(c) What would be the annual interest income on each of the options calculated in (b)? (Again, use fractions of units to three decimal places.)(d) Assume you can reinvest the interest income as it is received (at the end of each year) at 10% per annum. Calculate the total (face) value of the bond principal plus interest reinvested for your bond A and bond B total investment. (Again, use fractions of units to three decimal places.)Hint:We are reinvesting the interest and thus need the future value of these deposits, plus the future (face) value of the bond at year 5.You need to use the answers derived in (b) and (c) above to calculate separately the total reinvested interests and the future value of bond A and Bond B.(e) Why are the two values calculated in (d) different? If you are concerned that you will earn less than the 12% yield to maturity, which bond would be the better choice? Show calculations of yields to maturity to support your answer.Hint: Use the approximate formula as shown in Module 2 in the learning guide.