QUESTION 1 (25 Marks)

Link 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 French subsidiary company, Nico Guard, or set up a new division in its home market.

The relevant figures for these two options are:

Set up new division at homeRandCost of setting up premises30 000 000

Cost of machinery50 000 000Annual sales (after deducting depreciation which is calculated at 10%on cost)65 000 000

Annual variable cost8 000 000

Additional head office expenses1 750 000

Existing head office expenses1 250 000

Acquisition Euro

Acquire shares from existing shareholders9 000 000

Redundancy costs2 000 000

Annual Sales19 000 000

Annual variable costs7 000 000

Annual fixed costs4 000 000

Consultants fees1 050 000

Additional information:

The project is expected to last for 8years.

Link Limited, current cost of capital is 13%.

The Frenchinflation is expected to be below the South African inflation by 4% per year, throughout the life of thisinvestment.

The current exchange spot rate is R17to the Euro ().Required:

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

1.2 Advise Link Limited on the viability of these two opportunities.(3marks)