Management accounting

b) The manager of Tsoene Motho Industrial Plc is considering relocation of the processing facilities. He has narrowed down the choices to two options. Data relevant for this decision is as follows: Location A This location is in Maputsoe and, although a cheaper option, there would be higher operating costs due to the higher wages that would need to be offered to recruit suitable workers. The capital cost of plant A is M5 million. Page 2 of 4 Location B This location is in Maseru would be very near transport links, which would save the firm money, but the site is relatively expensive. The capital cost of plant B is M10 million. Forecast information for each of the plants was produced as follows: Location A Location A Location B Location B Revenue receipts Operating payments Revenue receipts Operating payments M million M million M million M million Year 1 7.3 4.0 7.3 2.7 Year 2 7.5 5.2 7.5 3.3 Year 3 9.1 5.3 9.1 4.6 Year 4 9.8 6.5 9.8 5.5 Year 5 11.2 8.1 11.2 6.4 Additional information: i. A modification to the plant at location B to treat the pollution would need an extra capital cost of M2 million. In addition, operating payments would increase in each year by M400,000 The company's cost of capital is 10% per annum (Use 4dps for the Present Value factors) ii. Required Produce net present value calculations for the locations A and B. For Location B provide figures both for the plant in its basic form and also with the modifications to treat pollution (12marks)