Company invested in a new machine at a cost of N$150 000. The life of the machine is 3

years and the market value at the end of that period is zero. Wear and tear is allowed by the

receiver at N$50 000 per annum. Depreciation will also be allowed in equal amounts over 3

years.

The income and expenditure account over the next 3 years is projected as follows:

Year 1 Year 2 Year 3

Operating income 100 000 130 000 170 000

Interest (20 000) (12 000) (10 000)

Depreciation (50 000) (50 000) (50 000)

Earnings before tax 30 000 68 000 110 000

Tax (9 000) (20 400) (33 000)

Earnings after tax 21 000 47 600 77 000

Additional information

• Tax rate 30%

• WACC 18%

• Required return before tax 30%

You are required to:

a) Determine whether the company should invest in the project or not? Justify your

answer

b) Calculate the year-by-year Return On Investment (ROI) and the average ROI over the

3-year period

c) Calculate the annual Residual Income

d) Calculate the annual Economic Value Added (EVA) and the present value (PV) of the

EVA values

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