EcoGrid SunGrid Expansion & VitaPharm ROE Analysis – Capital Budgeting & DuPont Review

QUESTION 1        (73 marks)

EcoGrid Solutions Ltd (Eco) is a leading provider of eco-friendly gas-powered shower systems. Their innovative technology, which utilises state-of-the-art gas geysers, ensures a consistent supply of hot water while minimising environmental impact. A gas geyser is a type of water heater that uses natural gas or liquid petroleum gas (LPG) to heat water. Eco specialises in providing these shower systems to residential and commercial customers. The entity has a 31 July financial year end.

Eco has recently started exploring an opportunity to expand their product and services line to include Solar Power solutions. This will entail supplying and installing solar panels, inverters, and batteries for residential and commercial customers. Eco recognises the growing demand for renewable energy sources in South Africa and sees such a project as a strategic move to diversify its energy portfolio. The Solar Power project will be called SunGrid and will kick off on 1 August 2025.

Market research has provided insights into the optimal pricing structure of the product, as well as the expected sales figures. Eco’s Financial Accountant determined that the project should remain active for 5 years.

The initial capital cost of new equipment for the SunGrid project would be R25 000 000, payable before the project commences on 1 August 2025. After 5 years, the residual value of the equipment would total R9 000 000. The equipment is to be depreciated over a five (5) year period on a straight-line basis. According to section 12C of the South African Income Tax Act, the equipment will qualify for a wear-and- tear allowance of 40% of the cost in the first year and 20% of the cost in the subsequent years.

In expectation of the new venture, Eco has already purchased a bigger truck for the transport of large solar panels at a cost of R1 800 000. Assume depreciation is in line with the tax wear and tear allowance. The newly purchased truck will also reduce the after-tax transport costs for the existing gas-powered shower system product line by R45 000 per year.

Additional information regarding SunGrid expansion:

Eco has spent R380 000 on market research to determine whether this project is viable. The report also detailed the following information:

• SunGrid’s predicted Earnings Before Interest and Tax (EBIT) in the first operational year can be projected using the following probabilities: 35%: R12 500 000, 40%: R14 000 000, and 25%: R16 500 000. The entity’s

operational profit (EBIT) is expected to grow by 2% annually throughout the project.

• Working Capital investments at the end of each year are expected to be as follows and will be recovered at the end of the project’s life:

	31 July	31 July	31 July	31 July	31 July
	2026	2027	2028	2029	2030
	(R)	(R)	(R)	(R)	(R)
Inventory	4 550 000	4 900 000	5 700 000	6 200 000	6 500 000
Debtors	1 250 000	2 400 000	2 700 000	2 850 000	3 150 000
Creditors	(2 800 000)	(3 200 000)	(3 550 000)	(3 800 000)	(3 950 000)

Eco has a debt-to-equity ratio of 25%. They only have one debt instrument with a cost of debt rate of 12%.

Eco is not listed on the Johannesburg Stock Exchange (JSE), and therefore, the equity beta of the entity is not readily available. GasSol Technologies Ltd. is a similar entity listed on the JSE. This entity has a debt-to-equity ratio of 34% and a beta of 1.2. The average return offered in the renewable energy sector is 12.5%, whereas the long- term risk of the RSA government bonds’ rate of return is 9.2%.

Below is an extract from Eco’s latest Statement of Financial Position:

	31 July 2025
Cash	R3 850 000
Property, Plant and Equipment	R12 250 000
Intangible Assets	R985 000

Other non-current assets

R1 125 000

Eco faced many operating challenges in the past financial year (ending 31 July 2025). This resulted in an assessed loss of R4 500 000. The assessed loss is not ring-fenced.

Eco’s current predicted earnings before tax (excluding SunGrid) are expected to be as follows:

	31 July 2026	31 July 2027	31 July 2028
Earnings before tax	R2 100 000	R2 400 000	R2 900 000

The South Africa Income Tax rate applicable to companies is 27% and is expected to remain the same throughout the 5-year period.

Ignore Value Added Tax (VAT).

REQUIRED QUESTION 1	TOTAL
1.1 Advise EcoGrid Solutions on whether they should expand their
business by accepting the SunGrid project. Make use of the Net Present
Value AND Internal Rate of Return Capital Budgeting techniques.	65
Should you purposefully exclude an item from the valuation, indicate
this in your answer as well as the motivation for opting to do so.
Communication skill: Logical argument	1
1.2 Describe the process Eco’s Financial Accountant used to determine that the SunGrid project should have a five-year lifespan.   Additionally, clarify whether this five-year lifespan is guaranteed to remain unchanged and how the Financial Manager will assess this.	7
TOTAL QUESTION 1	73

QUESTION 2          (27 marks)

VitaPharm is a leading South African pharmaceutical company committed to advancing global health through innovative research, cutting-edge technology, and comprehensive healthcare solutions. Founded in 1990, VitaPharm has grown to become a trusted name in the pharmaceutical industry. VitaPharm is listed on the JSE and has a 28 February financial year end.

VitaPharm faced many challenges during the past financial year, including increased electricity and fuel costs. Furthermore, much of the equipment at the pharmacies had to be replaced due to age. There is also a new competitor on the South African market that provides the same products and services as VitaPharm. The stakeholders are concerned about the Return on Equity of the entity and have instructed the Chief Financial Officer to perform a detailed financial analysis to determine the cause of the reduction in the Return on Equity (ROE) over the past year. Below is the latest audited financial information for VitaPharm:

Statement of comprehensive income for the year ended 28 February 2025:

	2025 (R)	2024 (R)
Revenue from contracts with customers Cost of sales	31 283 476 (23 066 929)	32 663 513 (25 076 217)
Gross profit Other income	8 216 547 2 907 844	7 587 296 2 586 591
Total income Other expenses	11 124 391 (9 345 144)	10 173 887 (8 429 702)
Operating profit before interest and equity accounted earnings	1 779 247	1 744 185
Net financing costs	(439 936)	(350 236)
– Finance income	26 297	20 210
– Finance costs	(466 233)	(370 446)
Profit from associates and joint ventures	45 270	22 779

Profit before taxation Taxation	1 384 581 (364 093)	1 416 728 (389 181)
Total profit for the year, net of taxation	1 020 488	1 027 547

Statements of financial position at 28 February 2025:

	2025 (R)	2024 (R)
ASSETS
Non-current assets	9 578 031	6 067 828
Property, plant and equipment	7 799 705	4 429 226
Intangible assets	1 335 134	1 270 255
Investments	208 221	194 403
Loans receivable	68 603	–
Deferred taxation	166 368	173 944
Current assets	10 922 955	9 447 980
Inventories	8 662 558	6 356 781
Trade and other receivables	2 231 553	2 583 384
Loans receivable	126 111	214 062
Taxation receivable	18 362	6 368
Cash and cash equivalents	884 371	287 385
Total Assets	21 500 986	15 515 808
EQUITY AND LIABILITIES
Equity and reserves	2 472 124	1 900 395
Share capital	1 155 554	1 155 554
Retained earnings	1 865 235	1 554 837
Other reserves	(176 541)	(709 601)
Non-controlling interest	58 569	31 295
Total Equity	5 374 941	3 932 480
Non-current liabilities	3 842 967	3 232 905
Lease liability	2 486 298	2 660 592
Loans payable	1 282 337	501 479

Deferred taxation	74 332	70 834
Current liabilities	12 283 078	8 350 423
Trade and other payables	6 863 682	6 103 666
Lease liability	581 827	567 043
Loans payable	3 388 341	797 475
Employee-related obligations	265 241	292 871
Deferred revenue (contract liability)	83 897	77 170
Contingent consideration	–	–
Taxation payable	48 947	64 644
Bank overdraft	1 051 143	447 554
Total equity and liabilities	21 500 986	15 515 808

The Junior Accountant was tasked by the CFO to provide the following additional information based on the financial statements provided:

	2025   R	2025 Industry sector	2024   R
Net profit	1 020 488		1 027 547
Sales	31 283 476		32 663 513
Total Assets	21 500 986		15 515 808
Total Equity	5 374 941		3 932 480
NP %	3.26%	6.5%	3.14%
ROA	4.75%	7.54%	6.63%
ROE	18.99%	21.1%	26.13%
Total Asset Turnover	1.45	2	2.11
Financial Leverage multiplier	4	3.12	3.96

REQUIRED QUESTION 2	TOTAL
2.1 Explain why using the Du Pont Analysis would assist in determining
the cause of a decrease in the Return on Equity.	4
Communication skill: Clarity of expression	1
2.2 Discuss any CONCERNS regarding VitaPharm’s 2025 financial
performance,   AND   state   possible   causes   for   each                       concern	21
discussed.
	1
Communication skill: Clarity of expression
TOTAL QUESTION 2	27

Accounting Assignment Answers: Expert Answers on Above Taxation Questions

The decision with respect to acceptance or rejection of a project can be made by calculating npv and IRR. In the given project of EcoGrid, the calculation of npv and IRR indicates that it is good to accept SunGrid because of having a positive npv and IRR is greater than WACC. The project life of 5 year is considered reasonable.
Similarly in respect to VitaPharm, the calculation using DuPont analysis suggests that the profitability margin has been declining, the asset turnover is poor and there is high leverage which leads to declining return on equity. 

Disclaimer: This answer is a model for study and reference purposes only. Please do not submit it as your own work.

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