A motor vehicle component manufacturer is planning to open a new plant in East London

producing vehicle components for Mercedes Benz. The cost of the plant is R500 million. The

company is considering the profitability of the project over four years including the market value

of the plant at the end of the fourth year.

The details of the project at 1 March 2020 are:

a. The company incurred R & D costs for the products to be manufactured in the plant

of R15 million in 2019.

b. Expected revenues are R100 million in year 1, R120 million in year 2, R150 million

in year 3 and R160 million in year 4.

c. Expected labour costs are R20 million in year 1, R22 million in year 2, R24 million

in year 3 and R26 million in year 4.

d. Expected materials' costs are R35 million in year 1, R40 million in year 2, R45

million in year 3 and R50 million in year 4.

e. Expected energy costs are R15 million in year 1, R17 million in year 2, R20 million

in year 3 and R23 million in year 4.

f. Expected marketing and administration costs of the plant are R5 million in year 1,

R6 million in year 2, R7 million in year 3 and R8 million in year 4.

g. The market value of the plant at the end of the fourth year is estimated at R650

million.

h. The company expects to lose profit from a loss of sales at its Durban plant which

also produces vehicle components. The anticipated loss in profit is R2 million in

year 1, R3 million in year 2, R4 million in year 3 and R5 million in year 4.

i. The company's cost of capital is 12% p.a.

j. The company has allocated its head office fixed expenses of R5 million for each

of the four years.

Given this information (ignore taxes):

a. How is Net Present Value related to economic profit?

b. What is the Net Present Value of the decision to build and operate the new

plant?

c. Discuss some risks the company should consider before making a decision.

d. Should the company go ahead with the investment? Why/why not?