Mr Lebogang is the CFO of Metro Company, based in South Africa. He is facing a dilemma regarding a potential investment opportunity in Kenya, which requires 100 million ZAR for machinery and other assets. As part of his investment appraisal, he must consider the potential profitability and risks associated with the project. However, one of his primary concerns revolves around foreign exchange fluctuation and the expected rate of return. Despite seeing good economic prospects in Kenya, he is apprehensive about the potential financial implications of investing in a foreign country. As a result, he must carefully weigh the risks and benefits associated with the project before making a final decision. Ultimately, his ability to evaluate the project's viability will be crucial in determining whether the investment is worth pursuing.

The project is expected to yield the following profits after tax and depreciation over the next five years:

Year	1	2	3	4
Earnings (in millions KES)	320	320	360	360

The assets have to be depreciated at 20% on a straight-line method. The salvage value at the end of a five-year period may be taken as zero. The foreign exchange rates for Kenyan shilling to SA Rand are as follows:

Year	0	1	2	3	4
KES = 1 ZAR	7.43	7.35	7.20	7.42	7.15

The risk-free rate prevailing in South Africa is 5%, with a market rate of return of 13.75% and an expected beta of 0.8. Ignore taxation.

Required:

1. You are required to calculate the net present value of the project and, based on the interpretation, advise management on an appropriate decision. (17 marks)

Note: Present value of ZAR 1 at different rates of interest are as follows:

Year	10%	12%	14%	16%
1	0.9091	0.8929	0.8772	0.8621
2	0.8264	0.7972	0.7695	0.7432
3	0.7513	0.7118	0.6750	0.6407
4	0.6830	0.6355	0.5921	0.5523
5	0.6209	0.5674	0.5194	0.4761

The probabilities and associated returns of Mark Company are given below:

Return %	12	15	18	20	26	30
Probability	0.07	0.13	0.24	0.26

2. Calculate the risk of the security. (8 marks)

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