QUESTION $1$

MARKS$]$

You are a senior consultant at FENG Advisory and have been assigned to a project team that will

assist Kalahari Off$-$Road & Trailers $(\text{'}$Kalahari$\text{'}).$ Kalahari mainly manufactures caravans and off$-$road

trailers suitable for off$-$road and rugged terrain travel, but also manufactures and retails off$-$road

related leisure accessories, including travelling fridges$/$freezers$,$ solar panels and camping

equipment. The company is based in Southland, where it currently has one manufacturing facility in

Capital City, the country's largest city. The Southland currency is the Southland dollar $($S$$).$ Since its

foundation some decades ago, Kalahari's main focus has always been the local Southland market,

occasionally exporting a small number of its caravans or trailers to individuals who made use of their

products while visiting the country as international tourists.

In recent years, due to the company's long$-$standing reputation for manufacturing innovative and

high$-$quality products, and the increasing popularity of off$-$road leisure and travel, the international

demand for its caravans and trailers has grown multiple fold $-$ in particular from Northland, a large

and developed country well$-$known for its deep$-$rooted off$-$road leisure tourism industry. Kalahari is

now considering establishing an additional manufacturing plant in South City, a large industrial and

port city within Southland. If approved, the South City plant will focus mainly on manufacturing trailers

and caravan for exporting to Northland, but some of the products will be sold locally.

In considering the funding application for the South City project, INGB Bank$-$who is willing to provide

a loan of up to $90\%$ of the initial capital development cost $-$ requested Kalahari to submit a financial

feasibility of the project. You have been asked to determine the financial feasibility of the project,

based on the information provided below and calculating the project's net present value, internal rate

of return and the simple payback period.

The South City project team at Kalahari provided the following memorandum with additional

information regarding the project:

To: FENG Advisory

From: Kalahari Off$-$Road & Trailers

Date: May $2024$

Re: Proposed establishment of a manufacturing facility in South City, Southland, for mainly

export purposes.

Background

Kalahari Off$-$Road & Trailers has identified a manufacturing facility in the industrial zone of South

City, close to the harbour and international airport, which it will be able to lease for four years $-$ from

$1$ January $2025$ to $31$ December $2028-$ with the option to buy the property from the current owner

at the end of the lease term.

If the project is approved, we will immediately commence with site establishment at the $10000m^2$

factory facility $($including installation of plant and equipment, air conditioning and lighting$),$ with

operations at the South City site commencing $1$ January $2025.$ The facility will have an annual

capacity to manufacture $2500$ 'units' of the company's top$-$tier caravan $-$ the Kalahari Caracal $-$ of

which the bulk will be exported.Initial costs, revenue and operational expenses $($base scenario$)$

As requested, you will find herewith additional information regarding the South City project $($base

scenario$)$:Question $1($continued$)$ Memorandum from Kalahari Off$-$Road & Trailers

Additional notes

To be considered successful, Kalahari require a return of $18\%$ on investments $($which is equal to

the company's weighted average cost of capital$).$

The current corporate income tax rate in Southland is $27\%$ and is expected to remain unchanged

for the duration of the project $(2025$ to $2028).$

The loan from INGB Bank carries interest of $10\%$ per annum, capitalised monthly. The loan is

fully repayable from January $2025$ onwards, in equal monthly instalments over a period of three

years $-$ the first payment due on $31$ January $2025.$

Alternative scenario

Further to the base scenario, we request the consideration of the following Income variables to the

current $($all other estimates indicated in the base scenario remain the same$)$:

Percentage of units exported: $90\%$

Sales price per Kalahari Caracal unit for export $(2025)$: N$10000$

Anticipated Nf:S$ exchange rate $($equivalent of N$1$:$2026$ onwards: The S $ weakens by $7\%$ per

year against the $Nf.$

REQUIRED

TOTAL: $30$ MARKS