QUESTION FOUR

Sherwood Limited is an American based manufacturer of heavy-duty equipment. The company is currently investigating two projects for expansion. It can only undertake one of them and has asked your advice in deciding which one to proceed with. Project Bella: Production at the existing factory could be expanded. The cost of the new plant for this option would be an initial outlay of $121 000 000. This would result in an additional $12 200 000 profit being earned in each of the 6 years that the project would last. The new plant to be fully depreciated over the 6 years, on a straight-line basis, in accordance with the company's accounting policy. The financial team has also determined that the new plant must bear its share of the existing overheads and that amounted to $320 000 per annum. These expenses were also included in the profit calculation. Consultant fees cost $10 000. Project Bow: Production could be increased by purchasing a new manufacturing facility in South Africa. The cost of the facility would be an initial outlay of R320 000 000. Annual sales for the 6-year period are expected to be R92 000 000, and fixed and variable cost of R13 million and R3 million respectively. Depreciation is calculated using the straight-line method. Consultants' fees are expected to be R1 250 000. Additional information: * The South African inflation is expected to exceed the American inflation by 2% throughout the life of the project. * Sherwood Limited's cost of capital is currently 9%. * The current spot exchange rate is R16.44/$.

4.1 Advise Sherwood Limited which project they should undertake, showing your calculations and assumptions to support your advice (22 marks). NB. Please put this answer in a table format

4.2 Advise Sherwood Limited if it is worth investing in neither, in one or in both of these projects (3 marks)