1 (60 marks) & Food Ltd is an unlisted company in the retail industry. The company is out of Gauteng and looking to compete with the big brands. The s competitive edge is a digital solution whereby all goods are tagged and added at the cash register. The company also operates on a cashless with payment having to be made by card or Snapscan The company's of directors is considering an expansion into Europe by opening a branch in of the European countries. It is forecasted that this market wibe profitable for next 5 years, afterwards the branch will be closed down. This company will stock from the South African company, and sell it abroad financial projections of the new branch the next five years are as follows R000 Year 1Year 2 Year 3 Year 4 Year 5 Before 5 000 5500 5 500 6000 6 500 initial cost of the project will amount to EUR15m, which comprises EUR12m of assets and EUR3m of working capital. The assets are depreciated over life of the project on a straight line basis with a residual value of 10%. The tax onthe fixed assets wil be 40% inthe first year, and 20% in each year The fixed assets will be sold at this point for a projected EUR2 000 000 profitloss made on the sale is already included in the above figures). Big Ltd evaluates projects using nominal ZAR cash fows and a nominal discount rate. EUR cash flows are converted to ZAR using the forward rate and ther discounted at the ZAR nominal rate The following information is based on recent economic forecasts: Inflation in the EUR is expected to remain constant at 4% o Inflation in South Africa is expected to remain constant at 66 o The current exchange rate is EURIZA EUR1.00 R14.50 *Tax-28% *Cost of Debt for Big Ltd compnses bank loan with a nonnal nerest rate of 8% (pre tax) capitalised quarterly Beta for Big Ltd 12 * The return made on similar investments in South Africa is 12% *Assume a nsk free rate of 7%. Gearing 65% are the Financial Director of Big Ltd. Write a memo to the Managing Director him on the above mentioned opportunity. The report must include the I.I Calculation of the weighted average cost of capital (WACC). (10) 1,2 Assuming a WACC of 10 %. Calculate ofthe NPV Net Present Value) (30) 1.3 Using the above NPV analysis advise the managing director whether or not to accept the project. Consider both financial and non financial factors 14 Advise management what form of finance would be considered to fund the project (5) 1.5 Discuss the risk related to an overseas investment (6) 16 Discuss whether NPV analysis anappropnate techique to use for evaluation of his project (4) 1 (60 marks) & Food Ltd is an unlisted company in the retail industry. The company is out of Gauteng and looking to compete with the big brands. The s competitive edge is a digital solution whereby all goods are tagged and added at the cash register. The company also operates on a cashless with payment having to be made by card or Snapscan The company's of directors is considering an expansion into Europe by opening a branch in of the European countries. It is forecasted that this market wibe profitable for next 5 years, afterwards the branch will be closed down. This company will stock from the South African company, and sell it abroad financial projections of the new branch the next five years are as follows R000 Year 1Year 2 Year 3 Year 4 Year 5 Before 5 000 5500 5 500 6000 6 500 initial cost of the project will amount to EUR15m, which comprises EUR12m of assets and EUR3m of working capital. The assets are depreciated over life of the project on a straight line basis with a residual value of 10%. The tax onthe fixed assets wil be 40% inthe first year, and 20% in each year The fixed assets will be sold at this point for a projected EUR2 000 000 profitloss made on the sale is already included in the above figures). Big Ltd evaluates projects using nominal ZAR cash fows and a nominal discount rate. EUR cash flows are converted to ZAR using the forward rate and ther discounted at the ZAR nominal rate The following information is based on recent economic forecasts: Inflation in the EUR is expected to remain constant at 4% o Inflation in South Africa is expected to remain constant at 66 o The current exchange rate is EURIZA EUR1.00 R14.50 *Tax-28% *Cost of Debt for Big Ltd compnses bank loan with a nonnal nerest rate of 8% (pre tax) capitalised quarterly Beta for Big Ltd 12 * The return made on similar investments in South Africa is 12% *Assume a nsk free rate of 7%. Gearing 65% are the Financial Director of Big Ltd. Write a memo to the Managing Director him on the above mentioned opportunity. The report must include the I.I Calculation of the weighted average cost of capital (WACC). (10) 1,2 Assuming a WACC of 10 %. Calculate ofthe NPV Net Present Value) (30) 1.3 Using the above NPV analysis advise the managing director whether or not to accept the project. Consider both financial and non financial factors 14 Advise management what form of finance would be considered to fund the project (5) 1.5 Discuss the risk related to an overseas investment (6) 16 Discuss whether NPV analysis anappropnate techique to use for evaluation of his project (4)