ASSIGNMENT 6: FINANCIAL MANAGEMENT QUESTION 1 (25) Tony Limited is an American based manufacturer of heavy-duty equipment. The company is currently investigating two projects for expansion. It can only undertake one of them and has asked your advice in deciding which one to proceed with. Project A: Production at the existing factory could be expanded. The cost of the new plant for this option would be an initial outlay of $50 million. This would result in an additional $1 200 000 profit being earned in each of the 10 years that the project would last. The new plant to be fully depreciated over the 10 years, on a straight-line basis, in accordance with the company's accounting policy. The financial team has also determined that the new plant must bear its share of the existing overheads and that amounted to 8% of total sales per annum. Furthermore, additional expenses attributed to the expansion of the existing factory is R44 750. All of these expenses were included in the profit calculation. Project B: Production could be increased by purchasing a new manufacturing facility in South Africa. The cost of the facility would be an initial outlay of R40 000 000. In addition, equipment must be purchased and installed for the safety of workers according to the laws and regulations set by the South African government. The cost of this equipment is R3 000 000 and cost of installation is R250 000. Annual sales for the 10-year period is expected to be R210 million annually, and fixed and variable cost of R60 million and R50 million respectively. The fixed cost includes depreciation of R22 million per annum. Consultants fees is expected to be R1.2 million. Additional information: * The South African inflation is expected to exceed the American inflation by 2% throughout the life of the project. * Tony's cost of capital is currently 12%. * The current spot exchange rate is R15.27/$. Required: 1.1 Make all the necessary calculations for the two options. 1.2 Advise Tony Limited on which of these two projects would be more profitable (3) (22)