Compute the necessary calculations and advise DD Traders Limited if it is worth investing in neither, in one or both of these two opportunities.
DD Limited, South Africa, is a specialist manufacturer of electronic scooters. In seeking to expand its operations, it could acquire a French subsidiary company, AAA Limited, or set up a new division in its home market.
The relevant figures for these two options are:
Set up new division at home R and
Cost of setting up premises 2 2 440 000
Cost of machinery 8 7 00 000
Annual sales 33 000 000
Annual variable cost 1 4 050 000
Additional head office expenses 1 300 000
Existing head office expenses 3 220 000
Depreciation: machinery 10% on cost annually 8 7 0 000
Acquisition Euro
Acquire shares from existing shareholders 28 000 000
Redundancy costs 5 000 000
Annual Sales 39 000 000
Annual variable costs 18 000 000
Annual fixed costs 10 000 000
Consultants fees 750 000
Additional information:
- The project is expected to last for 7 years.
- DD Limited, current cost of capital is 10%.
- The French inflation is expected to be below the South African inflation by 1% per year, throughout the life of this
investment.
- The current exchange spot rate is R24.50 to the Euro (€).
Required:
Compute the necessary calculations and advise DD Traders Limited if it is worth investing in neither, in one or
both of these two opportunities.
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