UNIVERSITY EXAMINATIONS

October/November 2022

MAC3761
Management Accounting III

100 Marks
Duration: 3 Hours
30 minutes for uploading to myExams (submission cut-off time)
EXAMINATION PANEL AS APPOINTED BY THE DEPARTMENT

Use of a non-programable pocket calculator is permissible

Close book examination
The examination question paper remains the property of the University of South Africa and may not be
distributed beyond its intended use for this examination

THIS PAPER CONSISTS OF TWELVE (12) PAGES IN TOTAL.

THIS IS NOT AN OPEN BOOK EXAM! YOU ARE NOT ALLOWED TO COPY FROM OR CONSULT
ANY SOURCES INCLUDING YOUR TEXTBOOK OR TUTORIAL LETTERS. YOU ARE NOT
ALLOWED TO CONSULT ANY THIRD PARTY FOR THE DURATION OF THE EXAM SESSION.

EXAM QUESTION PAPER INSTRUCTIONS:

Please note:
1. This paper consists of TWO (2) questions, comprising 12 pages in total (including
instructions).
2. You are strongly advised to carefully read the required before attempting the questions
concerned.
3. All questions must be answered.
4. All calculations must be shown.
5. Each question attempted, must commence on a new (separate) page.
6. Include (write/type) your student number in the document/answer file.
PROPOSED TIMETABLE FOR THIS EXAM: Marks Minutes

Question 1: Costing systems; Cost classification and behaviour; Cost estimation;

Budgeting planning and control; Direct and absorption costing methods; Overheads 50 90
allocation; Inventory management; Relevant decision-making; and Transfer pricing.
Question 2: Strategy and risk management; Capital budgeting; Financing decision;
Treasury function. 50 90

Converting your answers to a PDF file and successfully uploading your one PDF file.
You must successfully upload your PDF file on myExams before 19:15 South African
30
time, 2 November 2022. The submission platform will automatically close at 19:15
(2 November 2022, South African time) and no submission can be made henceforth.
100 210

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The Invigilator App

Please take note that the use of The Invigilator App is compulsory for this assessment/exam.
Please take note that The Invigilator App will request you take a picture of every page of your
answer sheet at the end of the assessment.
Please take note that this does NOT replace your formal answer file “scan and upload” to your
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• If you are performing a written or Scan-and-Upload assessment:

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• The Invigilator App will request you to take a picture of every page of your answer sheet at the
end of the assessment ie at 18:45, you have 10 MINUTES to take pictures of every page
of your answer sheet. Unless otherwise specified by your institution, this does NOT
replace the normal upload of your script to your institution’s online portal and you still
need to upload on myExams by 19:15.
• After completing invigilation and following all app instructions, you must upload your Invigilation
App data. If however there is a delay in the upload of the app data at the end of the assessment,
you should prioritise the upload of your script to your university portal and you can temporarily
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and do it after you have successfully uploaded your script to the exam portal.
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important to understand that once the invigilation ends at the end of the assessment ie
at 18:45, you have only 10 minutes to take a photo of each page of your answer sheets.
Once the photos have been taken, you then have 48 hours to upload everything onto the
App database.
• Should you encounter any technical difficulty,
please WhatsApp The Invigilator Helpdesk on 073 505 8273.

INSTRUCTIONS – ACCESS myEXAMS AND UPLOADING ANSWER FILES:

Follow these steps to access myExams and submit your take-home answer file.
Direct link to access the myExams portal (College of Accounting Sciences):
https://cas.myexams.unisa.ac.za/my/

Access the myExams portal and navigate to the module site and take-home assessment:
1. Go to the College of Accounting Sciences’ myExams portal
https://cas.myexams.unisa.ac.za/my/
2. Type in your myUnisa username and password and click on the Login button.
3. Click on the myExams button in the header and select the module, MAC3761-22-EX10, for
which you need to complete the exam.
4. On the module’s exam page select the Take-Home assessment
MAC3761-Exam Oct/Nov 2022.
5. You can now review the assessment information and start.

Follow the steps below to complete and submit a Take-Home exam assessment:
1. Open the Take-Home assessment MAC3761-Exam Oct/Nov 2022.
2. Download the question paper and note any additional information provided, such as the
proctoring tool to be used.
Please take note that the use of The Invigilator App is compulsory for this exam. Failure to
use the application will result in your exam mark being retained.
3. Complete the Take-Home assessment in MS Word or on paper.
Note: MS Word documents need to be saved as PDF documents, and paper-based answers
must be scanned into a combined PDF document.
Note: Students must upload their answer scripts in a single PDF file.
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Submission button.
Note: You only get 10 minutes after the due time (ie. after 18:45) to take pictures of
your script for the Invigilator App BUT 30 minutes to upload your answer sheet on the
myExams portal. DO NOT MISS THE SYSTEM CUT-OFF TIME OF 19:15 ON MYEXAMS!
5. Note the file requirements such as:
a. File size limit.
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b. Number of files that can be submitted.
c. File formats allowed.
6. Check the acknowledgement checkbox and upload your answers document and then click
on the Save changes button.
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The submission statement is the declaration of honesty, where you acknowledge that the
submission is your own work.
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link to check if it's correct.
8. If you need to resubmit a file, you can click on the Edit Submission button. Note: You will
need to delete any existing files.

NOTE: You must successfully submit your single PDF file before the submission cut-off time.
Please do not wait until the last minute to submit, instead, submit your file as soon as the three (3)
hours duration of the examination has passed. If you do not successfully submit before the cut-off
time you will be marked as absent from the examination. The system will close for submission
at 19:15 sharp.
October/November 2022 online examination rules
Students are expected to familiarise themselves with online examination rules before their
examination sittings.
Examination sessions commence at the time indicated on the final examination timetable. You are
required to adhere strictly to the specified times.
For file upload/take-home examinations:
1. Students must upload their answer scripts in a single PDF file on the official myExams platform
(answer scripts must not be password protected or uploaded as “read-only” files).
2. NO e-mailed scripts will be accepted.
3. Students are advised to preview submissions (answer scripts) to ensure legibility and that the
correct answer script file has been uploaded.
4. Students are permitted to resubmit their answer scripts should their initial submission be
unsatisfactory.
5. Incorrect file format and uncollated answer scripts will not be considered.
6. Incorrect answer scripts and/or submissions made on unofficial examination platforms
(including the invigilator cellphone application) will not be marked and no opportunity will be
granted for resubmission.
7. A mark awarded for an incomplete submission will be the student’s final mark. No opportunity
for resubmission will be granted.
8. A mark awarded for illegible scanned submission will be the student’s final mark. No
opportunity for resubmission will be granted.
9. Only the last file uploaded and submitted will be marked.
10. Submissions will only be accepted from registered student accounts.
11. Students who have not utilised invigilation or proctoring tools will be deemed to have
transgressed Unisa’s examination rules and will have their marks withheld.
12. Students have 48 hours from the day of their examination to upload their invigilator results
from the Invigilator App. Failure to do so will result in students deemed not to have utilised
invigilation or proctoring tools.
13. Students must complete the online declaration of their work when submitting. Students
suspected of dishonest conduct during the examinations will be subjected to disciplinary
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processes. Students may not communicate with other students or request assistance from
other students during examinations. Plagiarism is a violation of academic integrity, and
students who do plagiarise or copy verbatim from published work will be in violation of the
Policy on Academic Integrity and the Student Disciplinary Code and may be referred to a
disciplinary hearing. Unisa has zero tolerance for plagiarism and/or any other forms of
academic dishonesty.
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time. This means that you should start uploading at 18:45 and the system closes at 19:15
sharp. Students who experience technical challenges should report to the SCSC on 080 000
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contacting the Student Communication Service Centre (unisa.ac.za)) within the 30 minutes
upload time. Queries received more than 30 minutes after the official examination
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Postgraduate students experiencing the above challenges are advised to apply for an aegrotat
and submit supporting evidence within ten days of the examination session. Students will not
be able to apply for an aegrotat for a third examination opportunity.
Postgraduate/Undergraduate students experiencing the above challenges in their second
examination opportunity will have to reregister for the affected module.
Students experiencing technical challenges should contact the SCSC on 080 000 1870 or via e-
mail at [email protected] or refer to the Get help during the examinations by
contacting the Student Communication Service Centre (unisa.ac.za) for the list of additional
contact numbers. Communication received from your myLife account will be considered.

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QUESTION 1 (50 Marks; 90 Marks)
Stellenbroach Family (“SF”) owns a 25-hectare piece of prime land that is considered suitable for both
agricultural and residential purposes. Currently, only two of these 25 hectares are in use, and primarily
for residential dwelling. SF has now decided to make productive use of the land and will soon establish
a wine and juice making group comprising of two major operating companies. SF has also consulted
with McKingsley Business Consultants (“MBC”), a leading business consulting firm to assist with its
business case. Companies within the SF group will adopt the absorption costing method and the first-
in-first-out (FIFO) inventory valuation method.

1. EXTRACT FROM THE BUSINESS CASE FOR SF-WINERY

One of the group companies to be formed is SF-Winery, whose operation will consist of a vineyard
where white grapes will be produced; wine cellars and juice tanks wherein white grapes will be
processed and subsequently fermented to produce semi-sweet white wine (“SWW”) and white grape
juice (“GJ”). In each financial year, SF-Winery will have one harvest period with an expected average
yield of 600 tonnes of white grapes. Amongst others, the costs relating to the process of wine and juice
making include soil preparation, seeds costs, seed planting costs, irrigation costs, pest control costs,
farm labour costs, harvesting costs and quality inspection costs. After At quality inspection (the grading
process after harvest), grapes are separated into three grades, namely, Grade A (80% of the harvest);
Grade B (16% of the harvest) and Grade C (4% of the harvest).

Only Grade A grapes will be fermented to produce the semi-sweet white wine. During the fermentation
process, a small quantity of Grade A grapes will result in waste. This waste has no sales value and will
be discarded at a cost of R0,15 per kilogram. Thereafter, wine will be stored in barrels to mature and
will only be bottled just before sale. The expected selling price to wine retailers is R65 per bottle of semi-
sweet white wine. Grade B grapes will be processed further to make grape juice, and cellulose and other
organic compounds are added to the grape juice to give it a rich and natural taste (grape juice will be
sold to local retailers at R30 per litre). The annual production is expected to match the annual demand
at 304 000 litres of semi-sweet white wine and 152 000 litres of white grape juice. Grade C will be sold
to pig farmers at R4,50 per kilogram.

2. IRRIGATION COST ESTIMATION FOR SF-WINERY

SF-Winery is exploring the most cost-effective option for its water supply requirements, considering
recent unstable water supply. In this regard, two options (municipality supplied water or borehole
supplied water) are available regarding the expected monthly average water requirements of 11 500
kilolitres. Upon inquiry from Morara Wines, a similar nearby winery, SF was able to obtain Morara Wines’
municipal invoices as shown below.

2.1. MUNICIPALITY SUPPLIED WATER

2.1.1. If the municipality supplied water option is considered, SF will use Morara Wines’ municipal
invoices as a base for estimating irrigation costs. However, the municipality is soon expected to
apply a 6% annual inflationary increase on all its charges. Included in the total municipal charges
below are fixed refuse and sanitation charges of R3 750 per month. Morara’s municipal invoices
reflected the following:
Municipal invoice Water Total municipal
month consumption charges
September 12 500 kilolitres R65 000
October 11 280 kilolitres R59 510
November 11 300 kilolitres R57 905
December 12 350 kilolitres R65 560

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QUESTION 1 (continued)
2.2. BOREHOLE SUPPLIED WATER
2.2.1. If the borehole supplied water option is considered, SF will use one of the boreholes currently
used for its residential needs. This borehole was drilled four years ago at a cost of R38 000. With
this option, this borehole will be used to supply 40% of the irrigation water requirements for the
grapes at pumping costs of R2,60 per kilolitre.
2.2.2. SF-Winery will be required to drill a second borehole from which the other 60% of the irrigation
water requirements for the grapes will be pumped. The current drilling costs for a similar borehole
is R45 000, however, as a repeat client, SF is entitled to a 5% drilling costs discount. This borehole
will be used exclusively by SF-Winery. New advanced drilling and pumping technology will make
it possible to reduce the pumping costs for this borehole only, to R1,80 per kilolitre.
2.2.3. SF-Winery will depreciate the boreholes at 5% per annum on a straight-line basis.
2.2.4. The expected annual service costs will be R5 000 for the existing borehole, 70% resulting from
domestic usage and 30% from business usage). For the new borehole, the service costs will be
R3 000. The service costs are mainly driven by the level of usage of boreholes.

2.3. To set up the irrigation system to cover the entire farm, the associated costs are expected to be
R87 000, once-off payable upfront regardless of the option chosen.

3. SF-BOTTLING
3.1. One of the other companies that will be set up is SF-Bottling. The company will manufacture and
sell empty wine bottles (bottles) to both SF-Winery and external customers. SF-Bottling will have
maximum capacity to manufacture 960 000 bottles annually. The bottles come in a standard 750
millilitre size. Although the expected annual demand for the bottles is 410 000 and 640 000 for
SF-Winery and external customers respectively, SF-Bottling will be required to prioritise the supply
of the bottles to SF-Winery. The grape juice is packed in recyclable 1 litre, 2 litre and 5 litre
containers which are sourced externally and not from SF-Bottling.
3.2. The manufacturing costs based on maximum manufacturing capacity are estimated as follows:
Details Amount
Raw material costs per bottle (for glass) R5,50
Direct labour costs per bottle @ R45 per hour R4,50
Total annual manufacturing overheads R2 448 000

Manufacturing overheads comprise of variable and fixed components. Variable manufacturing

overheads are estimated at R21 per direct labour hour. Fixed manufacturing overheads are
allocated based on the annual maximum manufacturing capacity of the bottles.
3.3. Bottles will be sold to external customers packed in a custom-made wooden crate (crate) just
before sale. This crate holds eight bottles and will always be packed as such for bottle sales. All
the crates will be bought from Bathokwa Crates (“Bathokwa”) at a purchase price of R12 per crate.
SF-Bottling has noted numerous complaints from Bathokwa’s existing customers about the fragility
of the crates. In the main, it is complained that unused crate inventories stored for an extended
period frequently break beyond repair, and in large volumes. Internal sales will not be packed in
crates.
3.4. Currently, according to the SF group, to encourage goal congruency, SF-Bottling will sell/transfer
bottles to SF-Winery at a price that equals SF-Bottling’s unit full manufacturing cost per bottle.
However, the selling price will be R15,50 per bottle to external customers. Moreover, SF- Bottling
will incur delivery costs of R0,85 per bottle sold to external customers only.

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QUESTION 1 (continued)
4. MANAGEMENT OF THE WOODEN CRATES INVENTORY
Upon presenting to MBC the group’s business case, MBC recommended that instead of the proposed
just-in-time (JIT) inventory management technique, SF-Bottling should rather consider using the
economic order quantity (EOQ) technique. In this regard, the crates’ purchase price will remain the
same; the expected ordering costs are determined at R120 per order; while annual storage and
insurance costs are expected to be R0,75 and R1,50 per crate, respectively.

Furthermore, a safety inventory of 10 crates should be maintained while the applicable cost of capital is
11% per annum. The recommendation by MBC is based on a quantitative analysis. In this regard,
instead of an expected annual holding and ordering costs of R6 000 based on the JIT technique, MBC
is of the view that the implementation of the EOQ technique will only cost R4 500 per annum for holding
and ordering costs.

PLEASE GO TO THE NEXT PAGE FOR “REQUIRED” SECTION

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REQUIRED
For each question below, clearly show all your calculations; where necessary also indicate
irrelevant amounts with R0; and ignore time value of money and all tax implications.
(a) With reference to the information under “Extract from the business case for SF-Winery”
(section 1) above, draft a memorandum to the management of SF wherein you
recommend and motivate for the most appropriate costing system that SF-Winery
should use for the allocation of production costs of SWW and GJ. Calculations are not
required and other costing systems that are not considered appropriate, should not be
addressed. Your motivation (using information provided) must incorporate:
 A discussion of points from the information that support your
recommendation;
 An outline of the cost accounting treatment of the different products outlined
in the “Extract from the business case for SF-Winery”;
 Identification of possible methods for allocating costs to SWW and GJ; and
 Reference to supporting figures from the information where necessary.
Motivation 10 marks; Recommendation 1 mark and Layout 2 marks. (13)
(b) With regard to “Irrigation cost estimation for SF-Winery”:

(i) Determine the expected annual irrigation costs for each of the two given options
and recommend the most financially viable option of the two for SF-Winery’s water
supply requirements. [Your analysis should be based on the first year of operation
only]. (13)
(ii) Assume that SF-Winery chooses the municipality supplied water option. Discuss
four factors that could affect the accuracy at which SF-Winery can estimate the
expected irrigation costs. (4)
(c) After an assessment of SF-Bottling’s business case, MBC made the following
recommendation: “To encourage goal congruency, minimum transfer price principles
should be utilised to determine a unit transfer price regarding the transfer of all the
bottles required by SF-Winery from SF-Bottling.”
From SF-Bottling’s perspective, critically evaluate and subsequently conclude whether
the recommendation by MBC to adopt the minimum transfer price principles as opposed
to the currently proposed transfer price represents a sound financial recommendation.
 Support your evaluation and conclusion with relevant and necessary
calculations.
Supporting calculations 7 marks; Evaluation and conclusion 3 marks. (10)
(d)  For question 1 (d)(i) only, assume that instead of 960 000 bottles, SF-Bottling’s
maximum annual manufacturing capacity is 1 200 000 bottles and that the
R6 000 expected annual cost for the JIT technique is correct.
(i) From a quantitative perspective only, advise SF-Bottling whether the proposed
recommendation and view by MBC regarding changes to the inventory (wooden
crates) management technique is appropriate from a financial perspective. (8)
Calculations 7 marks; Advice 1 mark.
(ii) Without reference to quantitative aspects, identify and explain two features from
the scenario to motivate for JIT as the most appropriate inventory management
technique for the wooden crates. (2)
Total question 1 [50]

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QUESTION 2 (50 Marks; 90 Marks)
Pepper Clothing (“Pepper”) is a clothing retailer in South Africa with its head office located in Cape
Town. It sells low-cost clothes to mass lower- to middle-income end customers. Pepper now owns over
1 500 stores or franchised stores and employs more than 14 000 employees. The company has stores
across South Africa, with strong presence in Gauteng, the Western Cape and Limpopo. Pepper is the
largest single-brand retailer of low-cost clothing in South Africa and its board believes that there are
opportunities to take advantage of the rapid economic growth in some African countries. The latest
market research indicates that “discount clothing stores” offer the greatest opportunity for future growth
in Southern Africa, and as a result, the Finance Director has identified two investment opportunities.
Both these investments can be undertaken, but the board has put some financial restrictions on how
much can be expended on capital investments over the next few years. Details about the two
investments are as follows:

Investment 1 – Build a new “discount clothing store” in the Western Cape (South Africa)
The Western Cape offers the smallest number of “discount clothing stores” as a percentage of the Gross
Domestic Product of any province in South Africa. Pepper has already opened discussions with a seller
of suitable land as well as the local authority. If this acquisition is approved there will be some financial
assistance available to a purchaser such as Pepper. However, a decision is not expected from the local
authority for at least one month. Pepper has paid a non-refundable holding deposit of R50 000 on the
freehold land pending the outcome of its investment appraisal. The seller requires a decision within a
month. This investment appraisal will have to be done over an indefinite period, where a terminal value
must be established.

Investment 2 – Build a new “discount clothing store” in Zimbabwe

Pepper’s “own branded” products are already being bought and sold on by some retailers in Zimbabwe.
These products have proven to be very popular although the suppliers lack the resources to maintain
sufficient stock levels and provide a variety of quality goods to customers. The Zimbabwean government
is keen to attract inward investment although it generally insists on some involvement in the investment
and puts certain restrictions in contracts. A suitable site is available for Pepper to build its store and
operate from there for a period of 15 years. Today’s cost of using the land over the next 15 years and
disposal of the building at the end has already been calculated (see capital costs below). The United
States Dollar (USD) is widely used in Zimbabwe and all payments in Zimbabwe can be made in USD.
Capital costs for both investments:
Capital costs Investment 1 Investment 2
R’000 USD’000
Cost of freehold land 36 000
Cost of use of land 2 000
Building costs 50 000 3 200
Equipment costs 14 000 800

Projected profits for both investments:

Profits Investment 1 Investment 2
R’000 USD’000
Year 1 Year 2 Year 3 Year 1 Year 2 Year 3
Cash gross profit 28 000 31 750 35 000 5 000 5 750 6 500

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Other information
• Under Investment 1, income and expenses are expected to increase by 6% per annum from Year 4
onwards. This is approximately the expected rate of inflation in South Africa.
• Current spot rates are: USD 1,00 = ZAR 14,80. Assume that risk-free interest rates are currently 8%
in South Africa and 5% in the US. These rates are likely to be maintained until the end of Year 3.
• The Finance Director has concluded that the forecast for interest rates and future inflation in
Zimbabwe is unreliable. The directors of Pepper therefore assume, for convenience, that in
Investment 2 the income receivable in year 3 in South Africa Rand (R) terms will remain constant,
in nominal terms, until Year 15.
• Operating costs are assumed to be 60% of gross profit received each year in both investments.
• For the purpose of this evaluation, depreciation or capital allowances on land and buildings (including
use of land) must be ignored.
• Both operations will be located in “Industrial Development Zones”. This provides for accelerated
wear and tear allowances and equipment can be written off over two years for tax purposes.
• Refurbishment of buildings and replacement of equipment will be needed within the life of both
investments, but these costs have not as yet been identified and have been excluded from the
evaluation.
• If Investment 1 is chosen, in addition to other operating costs, storage costs will amount to 1% of the
store’s gross profit each year.
• If Investment 2 is chosen it will result in a decline in profits generated by the South African operations.
This R5 million annual loss is expected to remain fixed.
• If Investment 2 is selected, all profits from Zimbabwe will be repatriated to South Africa at the end of
each year. The taxable income will be taxed at a rate of 28% in South Africa due to the tax treaty
that exists between the two countries. Tax is paid in the same year as the cash flows (including wear
and tear deductions) that give rise to the tax liability.
• Assume all capital costs are incurred in Year 0 and all operating cash flows are received or incurred
at the end of each year.
• 12% is considered an appropriate discount rate for Investment 1. A premium on this South Africa
rate of 400 basis points is considered appropriate for the investment in Zimbabwe (Investment 2).

Method of funding
The directors of Pepper plan to utilise accumulated cash reserves of R20 million towards the funding
any of the projects. This is not expected to influence the stable dividend policy currently employed. The
remaining capital investment will be funded by long-term borrowings aligned with the Finance Director’s
suggestions that debt should be used with the relatively low current interest rates.

If Investment 1 is chosen, the balance of the capital investment will be funded by a 20-year commercial
mortgage secured on the land and buildings. Interest will be fixed at 9% per annum, payable annually.

If Investment 2 is chosen, the balance of the capital investment will be funded by one of the following
methods:
i. A 15-year commercial loan taken out in South African Rand (R) at 9,5% interest per annum
payable annually in arrears, with the capital being repayable at the end of the term;
ii. 15-year non-cumulative preference shares issued in USD at an annual dividend rate of 10% on
the capital;
iii. A USD-denominated loan from a bank based in the United States. Borrowing rates in this market
appear very favourable at the present time. The interest rate will depend on the bank’s perceived
risk of the investment.

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REQUIRED
For each question below, remember to:
• Clearly show all your calculations in detail;
• Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value);
(a) Explain the types of the capital investment projects Pepper Clothing is planning to
embark on and advise on how best these can be evaluated using capital budgeting
techniques. (4)
(b) Calculate the net present value (NPV) in South African Rand for each of the two capital
investments, applying the information provided in the scenario. (17)
(c) As the Senior Finance Manager of Pepper Clothing, you are required to prepare a
report to the Chief Executive evaluating the investment decision and its funding. Your
report should include the following sections:
(i) An evaluation of the two investments, including a discussion of the key risk factors (10)
Pepper Clothing should consider.
(ii) A discussion of how the abandonment, timing and strategic features of each
(4)
investment option may impact the investment decision.
(iii) A discussion of the advantages and disadvantages of the three methods of funding
outlined in the scenario for Investment 2. Use appropriate calculations, where (12)
possible, to support your arguments.
(iv) Recommendations about the choice of investment and, if relevant, the method of (3)
funding.
Total question 2 [50]
TOTAL (questions 1 and 2) 100

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