NE (a) The Manchinchi Attire Company PLC is evaluating alternative uses for a warehouse building purchased for K500,000. If neither project is taken, the company will continue to rent the warehouse to its current tenants at K18,000 per year. The alternatives are (i) Manufacture denim shirts. Since consumer tastes change relatively fast, the company expects to manufacture this product for only three years. They will have to spend K16,000 to modify the building for this project, and K44,000 for necessary equipment. They expect to generate K130,000 in sales for the following three years, at annual manufacturing costs of K82,000 (ii) Manufacture cologne. To manufacture this product, the company will have to spend K24,000 to modify the building for this project, and K156,000 for necessary equipment. They expect to generate K175,000 in sales for the following three years, at annual manufacturing costs of K72,000. This project would also last three years. At the end of three years, the building will be restored to its original state, and rented to someone similar to the current tenant. The estimated cost of restoring the building will be K10,000 if the shirts are produced, and K20,000 if the cologne is produced The equipment for either project will be worthless at the end of three years. The firm's required rate of return on either investment is 12%. Assume, no tax & depreciation and that all cash flows for a given year occur at the end of the year, and the initial outlays occur at t-0. Based on the NPV method of project evaluation, which use of the building would you recommend and why? (20 marks) (b) In terms of listing on a stock exchange, suggest reasons why directors of a publicly limited company (PLC) might want to 'take a company private (5 marks) Total (25 marks) NE (a) The Manchinchi Attire Company PLC is evaluating alternative uses for a warehouse building purchased for K500,000. If neither project is taken, the company will continue to rent the warehouse to its current tenants at K18,000 per year. The alternatives are (i) Manufacture denim shirts. Since consumer tastes change relatively fast, the company expects to manufacture this product for only three years. They will have to spend K16,000 to modify the building for this project, and K44,000 for necessary equipment. They expect to generate K130,000 in sales for the following three years, at annual manufacturing costs of K82,000 (ii) Manufacture cologne. To manufacture this product, the company will have to spend K24,000 to modify the building for this project, and K156,000 for necessary equipment. They expect to generate K175,000 in sales for the following three years, at annual manufacturing costs of K72,000. This project would also last three years. At the end of three years, the building will be restored to its original state, and rented to someone similar to the current tenant. The estimated cost of restoring the building will be K10,000 if the shirts are produced, and K20,000 if the cologne is produced The equipment for either project will be worthless at the end of three years. The firm's required rate of return on either investment is 12%. Assume, no tax & depreciation and that all cash flows for a given year occur at the end of the year, and the initial outlays occur at t-0. Based on the NPV method of project evaluation, which use of the building would you recommend and why? (20 marks) (b) In terms of listing on a stock exchange, suggest reasons why directors of a publicly limited company (PLC) might want to 'take a company private (5 marks) Total (25 marks)
