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.