Maa Limited, South Africa, is a specialist manufacturer of security doors and gates. In seeking to expand its operations, it has the opportunity to acquire a Dutch subsidiary company, Baby Guard, or set up a new division in its home market. The relevant figures for these two options are:

Set up new division at home Rand

Cost of setting up premises 60 000 000

Cost of machinery 36 000 000

Annual sales 46 000 000

Annual variable cost 12 000 000

Additional head office expenses 2 000 000

Existing head office expenses 1 600 000

Depreciation: machinery 10% on cost annually 6 000 000

Acquisition Euro

Acquire shares from existing shareholders 22 000 000

Redundancy costs 7 000 000

Annual Sales 38 000 000

Annual variable costs 19 000 000

Annual fixed costs 7 000 000

Consultants fees 14 000 000

Additional information: - The project is expected to last for 10 years.

- Maa Limited, current cost of capital is 12%.

- The Dutch 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 R18 to the Euro ().

Required:

2.1 Make all necessary calculations for the two options. (22 marks)

2.2 Advise Maa Limited on the viability of these two opportunities. (3 Marks)