Question
QUESTION FOUR (25 Marks) Mamma Limited, South Africa, is a specialist manufacturer of electronic scooters. In seeking to expand its operations, it could acquire a
QUESTION FOUR (25 Marks)
Mamma Limited, South Africa, is a specialist manufacturer of electronic scooters. In seeking to expand its operations, it could acquire a French subsidiary company, Lux Limited, or set up a new division in its home market.
The relevant figures for these two options are:
Set up a new division at home Rand
Cost of setting up premises 8 440 000
Cost of machinery 7 700 000
Annual sales 52 000 000
Annual variable cost 14 000 000
Additional head office expenses 750 000
Existing head office expenses 1 005 000
Depreciation: machinery 10% on cost annually 770 000
Acquisition Euro
Acquire shares from existing shareholders 5 000 000
Redundancy costs 800 000
Annual Sales 11 000 000
Annual variable costs 3 000 000
Annual fixed costs 2 000 000
Consultants fees 600 000
Additional information:
The project is expected to last for 5 years.
Mamma Limited, the 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 R21.82 to the Euro ().
Required:
Compute the necessary calculations and advise Mamma Traders Limited if it is worth investing in neither, in one or both of these two opportunities.
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