Premium Cocoa Limited has successfully supplied cocoa beans and semi-processed cocoa powder to top brand cocoa products producers in many parts of the world.

Depending on the prevailing country risk and the customer needs assessment the company adopt either franchising, licensing, joint venture or foreign direct investment to establish the business interest in each country. The existing licensing business arrangement with Mandema Limited producers of Choco Taste in Posaland has come to an end as Mandema has indicated its intention to start a new business in Tourism. Business relations with other companies in Posaland are still in force. The reports generated on the overall assessment of the expired licensing arrangement with Mandema provide a good comfort for further investment in Posaland. The board of directors of Premium Cocoa considers the Posaland market a good place to set up a wholly-owned subsidiary to be called Pos Premium Limited that will produce the Creamy Choco Taste for an initial five years. A feasibility study commission by the directors at a cost of Ps 100,000 has produced the following information.

1. The initial cost of acquiring the current premises from Mandema Limited, will be Ps7.5 million, additional plant and machinery for the factory will cost Ps5 million. Because the premise is being acquired from Mandema, the installation of machinery will be a quick process and the manufacturing can commence almost immediately.

2. It is expected that in the first year 150,000 units of 425g will be produced and sold. Unit sales will grow by 25% per year for the next 3 years before falling to an annual growth rate of 10% for the final year. The price per unit is expected to be Ps50 in year one, which will increase by 5% each year through the life of the project.

3. In the first year, it is estimated that total direct material, labour, and variable overhead cost will be Ps11 per unit produced. After the first year, the direct cost is expected to increase by 15 percent every year.

4. Annual fixed overhead cost in current terms is Ps3.5 million, 35% of which is attributable to the Creamy Choco Taste project. The fixed overhead cost will increase by 4% per year.

5. Pos Premium will need to make working capital available of 20% of the anticipated sales revenue of the year at the beginning of each year. The working capital is expected to be released at the end of the fifth year.

6. Corporation tax is payable at 30% at each year-end without delay and any unused losses can be brought forward for set off against the following year's profit. Corporation tax in Ghana is 35% payable one year in arrears. No Ghana tax would be payable on the after-tax Pasoland profit.

7. Tax allowable depreciation is available on the plant and machinery on a straight-line basis. It is anticipated that the value attributable to the plant and machinery after five years is Ps700,000 of the price at which the project is sold. No tax allowable depreciation is available on the premises.

8. The Pos Premium limited would be producing the Creamy Choco Taste to a specially designed mixing formula provided by the parent company. Premium Cocoa Limited will charge Pos Premium a fixed royalty of Ps8 per unit.

9. The current spot rate is Ps3.5/Ghc. Inflation if Ghana is expected to be 8.5% in year one and two, then stabilize at 5.5% for the next 3 years. On the other hand, inflation4 rate in Posaland is estimated to be 12% year one through three and 15% in the last 2 years.

10. The risk adjusted cost of capital is given by the board of directors is 20%.

Required

a) Evaluate whether Premium Cocoa Limited should expand its sales in Posaland using foreign direct investment. State clearly any assumption you make. (14 Marks)

b) Discuss three exposures that this type of investment may expose Premium Cocoa limited to. (6 Marks)

Which additional information is required please?