Expansion Decision for a Manufacturing Company

Company Background

ABC Manufacturing $($Pty$)$ Ltd is an emerging apparel company based in Johannesburg. The company specialises in producing trending apparel and has established a strong brand presence in its domestic market. Lutho Mbeki, the founder and CEO, is looking to grow the company to meet the increasing demand. And given the growing competition, the expansion will also allow the company to maintain its competitive edge.

Expansion Project Overview

ABC Manufacturing is contemplating building a new production facility to increase its manufacturing capacity. The proposed expansion project involves significant upfront investment and the financial manager is now assessing the financial feasibility of the project and its potential impact on company value.

Financing the Project the total cost of the project is $R20$ million. The financial manager is contemplating funding this project with debt at a projected interest rate of $9\%.$ The projected cashflow from this expansion is shown in the table on the left. The company beta is $1\mathrm{.}8,$ the $5-$year SA government bond yield $($risk$-$free rate$)$ is $6\mathrm{.}5\%,$ the expected market return is $12\%,$ and the current company tax rate is $27\%.$