(25 Marks)

Davinci Industries is a South African based manufacturer of Steel, an award-winning steel graded. The company is currently investigating two investment projects. The information is given below:

Option One Involves extending the companys production facility at Shellcross, Kwa-Zulu Natal. The plant will cost R60 000 000 and is expected to create an additional annual profit of R9 700 000 for the 9 years life of the project. The following expenses were included in the annual profit: Depreciation was calculated on the straight-line method, over the life of project. Share of existing overheads, borne by head office amounting to 10% of additional annual profit. New fixed costs of R320 000 p.a.

Option Two Involves setting up an independent manufacturing facility in Japan. The cost of the facility would be an initial outlay 125 530 000. This would result in annual sales of 53 600 000, for the 9 years of the project. The annual fixed costs and variable costs are 27 500 000 and 12 200 000 respectively.

Note:

Davinci Industries current cost of capital is 13%.

The Japanese inflation is expected to exceed the South African inflation by 2% p.a. throughout the life of the project

. The current spot rate exchange is 0.14 Japanese yen to the Rand.

Compute the necessary calculations and advise Davinci Industries if it is worth investing in neither, in one or both of these two opportunities.