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CHMT Chemicals wants to expand its current production capacity by buying a machine
that can recover some steel that is lost in the steel slag (waste smelt product from steel
making process).
The slag contains 5% steel and 95% gangue (useless) material.
Machine A costs R1500 000 and can recover 95% of the steel in the slag. It has a working
life of 6 years with a salvage value of R30 000. The operating cost and fixed cost of this
machine is R200 per tonne of slag processed and R1000 000 per annum respectively, and
it can be assumed to be constant over the working life of the machine. The machine will
be brought into operation immediately at full capacity.
If the selling price of steel is R7250 per tonne steel (assume constant over period), calculate
the minimum tonnage of slag to be processed by the machine per month to give a modified
internal rate of return on investment of at least 25%.
The following additional information is provided:
 Tax rate per year is 29%.
 Depreciation is calculated on the straight-line method.
 Money can be borrowed at 18% and invested at 12%.

6 days ago

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