Question

Myride (Pty) Limited (“Myride”) provides shuttle services to individuals. The company was established in 2008 and prides itself with providing safe and convenient transport to its customers. Myride operates a fleet of 200 cars, and the drivers operating these cars are paid on commission, based on the revenue generated from the trips made per month.
Recently, a number of drivers have been unhappy with the way the current trip allocating system works. These drivers feel that the system allocates trips unfairly. Management has looked into this system and has resolved to procure and implement a new system, called TrackMyRide (TRM). The system will be implemented and operated over five years if feasibility studies prove to it to be successful.
The financial manager is however, concerned about the financial impact of the TRM. The financial manager has asked you to assist in evaluating the TRM and has provided you with the information for the project:
1. A feasibility study regarding the suitability of the TRM system for Myride (Pty) Limited was performed by an external consultant, costing R10 000. This payment was made upfront.
2. The system components will cost R2 400 000 to set up for Myride. The components cost is split over the first three years of the project, in equal instalments.
3. It will cost the company R150 000 to train the relevant staff members. The training will have to be done in the first year of the project. New staff will be hired to operate the system, at a total cost to company of R250 000 per annum. The total cost to company will be increased by 5,5% per annum for the duration of the project.
4. There will be an annual system maintenance cost estimated at R75 000 per annum.
5. An upfront working capital investment is expected to be R500 000.
6. The system will be sold at the end of the project for an amount of R300 000.
7. Myride currently generates a turnover of R15 000 000 per annum. If this project is implemented, turnover is expected to increase by 50% in the first year based on current revenue. Thereafter, this increased amount will increase by 15% annually.
8. The TRM system will see the company saving operating costs of 2% of revenue per year.
9. SARS allows a wear and tear of 25% per annum.
10. Myride has a cost of capital of 12% and the corporate tax rate applicable is 28%.
11. Cash flows take place at the end of each year, unless stated otherwise.
12. Round your answers to the nearest rand.

Use the scenario above to answer questions 14 - 20

14. What is the net cash flow after tax in year zero for capital budgeting purposes?

1. (R360 000) 2. (R500 000) 3. (R367 200)
4. (R352 800)

15. Calculate the incremental revenue in year 3.

1. R2 250 000
2. R10 875 000 3. R14 756 250
4. R29 756 250

16. What would the company have spent in total on additional staff costs after tax over the five year period?

1. R1 545 272 2. R1 395 272
3. R1 112 596
4. R1 119 796




17. Calculate the recoupment/(scrapping loss) on the sale of the asset after the five year period.

1. R300 000 recoupment
2. R100 000 recoupment
3. (R100 000) scrapping loss
4. (R300 000) scrapping loss


18. How much will the saving on operating cost be for year 5?

1. R684 394 2. R450 000 3. R787 053
4. R487 053


19. Which of the following statements regarding sunk cost is true?


1. It is a cost incurred irrespective if a company will embark on a project or not. It is not a relevant cost to base the decision on whether to accept a project or not.
2. When a cost is incurred before the start of a project in order to evaluate whether the project is acceptable or not.
3. When a cost does not add value to the project, it is called a sunk cost;
4. A sunk cost will always be shown as an outflow in year zero.

20. Which statement is true:

The following is considered part of working capital for a project:

1. Cash only;
2. Inventory, creditors, debtors and cash;
3. Debtors and cash;
4. Fixed assets

Answer 1

14. 2.(5,00,000)

Tax benefit is not available for Working capital, Component cost will start from Year 1 and Feasibility test cost is sunk cost.

15. 4. R29 756 250

Year	0	1	2	3
Sales	15,000,000	22,500,000	25,875,000	29,756,250
Growth		50%	15%	15%

16. 3. R1 112 596

Year	Employee Cost	Post Tax
1	150,000	108,000
1	250,000	180,000
2	263,750	189,900
3	278,256	200,345
4	293,560	211,363
5	309,706	222,988
		1,112,596

17. 4. (R300 000) scrapping loss

18. 3. R787 053 (39,352,641 *2%)

Year	0	1	2	3	4	5
Sales	15,000,000	22,500,000	25,875,000	29,756,250	34,219,688	39,352,641
Growth		50%	15%	15%	15%	15%

19. 2. When a cost is incurred before the start of a project in order to evaluate whether the project is acceptable or not.

20. 2. Inventory, creditors, debtors and cash;