QUESTION 1

Piston Limited, South Africa, is a specialist manufacturer of electronic scooters. In seeking to expand its operations, it could

acquire a French subsidiary company, Zooter Limited, or set up a new division in its home market.

The relevant figures for these two options are:

Set up new division at home Rand

Cost of setting up premises 14 440 000

Cost of machinery 7 700 000

Annual sales 102 000 000

Annual variable cost 24 050 000

Additional head office expenses 1 150 000

Existing head office expenses 2 220 000

Depreciation: machinery 10% on cost annually 1 100 000

Acquisition Euro

Acquire shares from existing shareholders 21 000 000

Redundancy costs 4 000 000

Annual Sales 32 000 000

Annual variable costs 15 000 000

Annual fixed costs 9 000 000

Consultants fees 800 000

Additional information:

- The project is expected to last for 7 years.

- Piston Limited, current cost of capital is 10%.

- The French inflation is expected to be below the South African inflation by 1% per year, throughout the life of this

investment.

- The current exchange spot rate is R23.50 to the Euro ().

Compute the necessary calculations and advise Piston Traders Limited if it is worth investing in

neither, in one or both of these two opportunities.