Question 1:

Using the information furnished, analyse whether Lesedi Pty (Ltd) should acquire a new printing facility or not. Use all the information to form a conclusion.

Lesedi (Pty) Ltd, a printing company based in Parkview, has been printing for 15 years out of Lesedis garage and would like to know whether it would make sense to purchase a new building or not. Lesedi has been granted an initial loan of R60 million by Paballo Bank, with an interest of 8% per annum. The new factory will cost R55 million to build up the new state of the art facility. The other R 5million will be used to acquire a new 3D printing machine which will have an Australian specialist come in at a cost of R150 000.00 to assemble the machine. The factory will be depreciated over 50 years, while SARS will give a 5% wear and tear allowance. The factory will produce 100000 prints per month for the first year at variable manufacturing cost of R5 per print. The prints will be sold at R15 per print. The operating income will increase as follows per annum:

5% Year 1

7% Year 2

9% Year 3

Year 4 and 5 will be consistent with year 3.

The machine has a 5year useful life, while SARS allows a 50% allowance in year 1 and thereafter a split of 10% per year. The machine has a salvage value of R250 000.00. The corporate tax rate is 27%. The weighted average cost of capital is 8%. The IRR is 10%. Using the NPV method, indicate whether Lesedi (Pty)Ltd should open a factory or not. State all quantitative and qualitative reasons.