Translux Ltd is a manufacturer of high-quality plastic products made to demanding specifications, which makes replicatio

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Translux Ltd is a manufacturer of high-quality plastic products
made to demanding specifications, which makes replication of
designs difficult. The company relies on marketing programmes to
ensure that models are constantly changed, and that demand follows
new designs. This allows the company to maintain margins in a
highly competitive environment.
Translux Ltd is considering the replacement of outdated
equipment, which will allow the firm to manufacture a new line of
products. The cost of the new equipment is R8,5 million and the
company qualifies for a depreciation deduction of 40% of cost in
the first year and 20% in each of the subsequent three years. The
equipment is also expected to reduce the cost of producing an
existing product line by R180 000 per annum before tax for another
four years, when the life of this product line is expected to end.
The expected residual value of the equipment is R2,1 million in
four years’ time. The new line of products will result in a selling
price of R85 per unit and variable cost of R38 per unit. The
product line is expected to result in a constant demand of 70 000
units per annum for four years.
The current tax value of the present equipment is R300 000 and
its current market value is R410 000, 00. The equipment is expected
to have a residual value of zero in four years’ time.
The investment in net working capital will amount to R475 000.
The marginal tax rate is 28% and the firm has a cost of capital of
12%.
1. Calculate the payback period (Pb), internal rate of return
(IRR) and the net present value (NPV) for the
replacement.
(20 marks)