Question 1 (50) Background Madam Macaron Ltd. (Madam Macaron) is an entity that retails French macarons. A macaron is a round, coloured sandwich cookie made with egg whites, sugar, and often ground almonds, with a buttercream, ganache, or jam filling. The entity was established 12 years ago when Mrs Maharaj went to France and was first introduced to the delectable taste of a real French Macaron. Mrs Maharaj was convinced that there was a market for these divine creations in South Africa and quickly closed a deal with a famous French macaron manufacturer. Until recently, Mrs Maharaj managed to successfully operate Madam Macaron Ltd. and is quite proud of her past accomplishments. However, due to the recent economic downturn, Covid 19 and increased competition, Madam Macaron has been experiencing a decline in sales and cash flow problems. Mrs Maharaj and her management team are extremely worried about the declining performance of the company especially compared to industry norms and are exploring various options to get the company back on track. Future local expansion option The management of Madam Macaron is considering local production of cheaper generic products in addition to importing the French macarons. Management believes that the expansion will assist the company in improving its cash flow problems. Mrs Maharaj is of the opinion that over the past 12 years she has learnt a lot about the confectionery and macaron industry and that Madam Macaron is in a position to expand their operations and to manufacture their own macarons - "It may not be French, but it will still be fantastic". The expansion will give Madam Macaron the ability to evaluate whether to continue producing locally or to revert to solely importing. This expansion will require the company to purchase a machine on 30 April 2022. The machine can be purchased locally at a cost of R120 000000 . General consideration - Assume that the book values of long-term liabilities are equal to the market values. - The corporate tax rate is 28%. Madam Macaron will be required to pay the machine supplier on 30 April 2023. It is anticipated that payment for the machine will be funded by a loan. Mrs Maharaj also sees this as an opportunity to provide work to the South African community. Financial information Below are extracts for Madam Macaron Ltd. taken from the Statement of profit and loss and other comprehensive income and from the Statement of financial position for the two most recent years: Extract from the statement of profit or loss and other comprehensive incomo for the voar onded 31 March Extract from the statement of financial nosition for the vear ended 31 March Notes: 1. Finance costs pertain to the interest expense on all interest-bearing debt. 2. Issued share capital consists of 600000000 ordinary shares. The shares have been externally valued by Val Consultants Inc at R2.50 per share on 31 March 2022 (R2.20 in 2021). 3. The overdraft limit is R200 000000 and has a 18% fixed interest rate