Question
(25 Marks) Eshowe (Ltd), South Africa, is a specialist manufacturer of automobile components. In seeking to expand its operations, it has the opportunity to acquire
(25 Marks) Eshowe (Ltd), South Africa, is a specialist manufacturer of automobile components. In seeking to expand its operations, it has the opportunity to acquire a German subsidiary company, Munich Ltd, or set up a new division in its home market. The relevant figures for these two options are: QUESTION 3 Set up new division at home Cost of setting up premises Cost of machinery Annual sales Annual variable cost Additional head office expenses Existing head office expenses Depreciation Acquisition Acquire shares from existing shareholders Annual sales Rand 29 000 000 18 000 000 Required: 3.1 Make all necessary calculations for the two options. 3.2 Advise Eshowe (Ltd) on the viability of these two opportunities. 25 000 000 7 000 000 1 000 000 900 000 4 700 000 Euro 13 000 000 8 000 000 4 000 000 1 000 000 800 000 Annual variable costs Annual fixed costs Consultant fees Additional information: - The project is expected to last for 10 years. - Eshowe (Ltd), current cost of capital is 12%. - The German 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 R15.50 to the Euro (). (22 marks) (3 marks)
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