ASSIGNMENT 2 Sasol SA is a large publicly traded firm on the JSE Securities Exchange. Based on a R 100,000 market feasibility study it is considering the manufacture and sale of a new line of products developed by its R&D research group at a cost of R 250,000. The finance department has gathered the following information on the investment proposal: Initial investment (straight line depreciation)R9 millionScrap value (year 4; tax paid yr. 5)R600,000Selling price (current price)R 80/unitExpected selling price inflation4%/yrVariable operating costs (current price)R35/unitFixed operating costsR 450,000Expected operating cost inflation3%/yr Market research estimates that demand for the product will be as follows: Year:1234 Demand (Units):50,00085,000100,00075,000 The company has a real return hurdle rate of 12%. Expected inflation over the project’s lifespan is 2.5%. Sasol pays income tax at 30% payable 1 year in arrears. The project would qualify for the tax offices “accelerated” capital cost allowance of 33.3% per year on a straight-line basis. Required: (a) Calculate the flowing values for the investment proposal: i. Net present value (10 marks) ii. Internal rate of return (7 marks) (b) Briefly discuss your findings and advise whether the proposal is financially attractive. (5 marks) (c) Assuming that the stock market is semi-strong efficient, what will be the implication for the firm’s stock price if Sasol, goes ahead with the project?
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