QUESTION ONE $(25$ Marks$)$

BB 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 $1$:

Production at the existing factory could be expanded. The cost of the new plant for this option would be an initial outlay of

$$31050000.$ This would result in an additional $$854000$ profit being earned in each of the $5$ years that the project would

last. The new plant to be fully depreciated over the $5$ 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 $$11750$ per month over the $5$ years. Both the depreciation and existing overhead expense were also

included in the profit calculation.

Project $2$:

Production could be increased by purchasing a new manufacturing facility in South Africa. The cost of the facility would be

an initial outlay of R$300400000.$ Monthly sales for the $5-$year period is expected to be R$22000000$ per month, and fixed

and variable cost of R$9000000$ and R$4000000$ per month respectively. Consultants fees is expected to be R$1000500.$

Additional information:

$*$ The South African inflation is expected to exceed the American inflation by $3\%$ throughout the life of the project.

$*$ BB Limited cost of capital is currently $11\%.$

$*$ The current spot exchange rate is R$20\mathrm{.}25/$$$.$

Required:

$1\mathrm{.}1$ Advise BB Limited which project they should undertake, showing your calculations and assumptions to

support your advice