QUESTION 2

Bongani 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, 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 420 000

Cost of machinery 250 000

Annual sales 168 000

Annual variable cost 12 000

Additional head office expenses (per month) 500

Existing head office expenses 16 000

Depreciation: machinery 10% on cost annually 25 000

Acquisition Euro Acquire shares from existing shareholders 8 000

Redundancy costs 500

Annual Sales 2 000

Annual variable costs 400

Annual fixed costs 700

Consultants fees 800

Additional information:

- The project is expected to last for 5 years.

- Bongani Limited, current cost of capital is 11%.

- The French inflation is expected to be below the South African inflation by 2% per year, throughout the life of this investment.

- The current exchange spot rate is R20 to the Euro ().

2.1 Advise Bongani Limited whether they should invest in either of the projects, showing your calculations and assumptions to support your advice.