QUESTION TWO Lyn 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 $42 050 000. This would result in an additional $1 650 000 profit being earned in each of the 15 years that the project would last. The new plant to be fully depreciated over the 15 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 $18 750 per month over the 15 years. Both the depreciation and existing overhead expense were also included in the profit calculation. Consultant fees cost R450 000. Project 2: Production could be increased by purchasing a new manufacturing facility in South Africa. The cost of the facility would be an initial outlay of R282 530 000. Monthly sales for the 15-year period is expected to be R8 000 000 per month, and fixed and variable cost of R5 000 000 and R2 000 000 per month respectively. The fixed cost includes depreciation. Consultants fees is expected to be R1 020 500. Additional information: * The South African inflation is expected to exceed the American inflation by 3% throughout the life of the project. * Lyn Limited cost of capital is currently 13%. * The current spot exchange rate is R17.25/$. 2.1 Advise Lyn Limited which project they should undertake, showing your calculations and assumptions to support your advice. Note: All answers must be typed out and workings must be shown QUESTION TWO Lyn 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 $42 050 000. This would result in an additional $1 650 000 profit being earned in each of the 15 years that the project would last. The new plant to be fully depreciated over the 15 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 $18 750 per month over the 15 years. Both the depreciation and existing overhead expense were also included in the profit calculation. Consultant fees cost R450 000. Project 2: Production could be increased by purchasing a new manufacturing facility in South Africa. The cost of the facility would be an initial outlay of R282 530 000. Monthly sales for the 15-year period is expected to be R8 000 000 per month, and fixed and variable cost of R5 000 000 and R2 000 000 per month respectively. The fixed cost includes depreciation. Consultants fees is expected to be R1 020 500. Additional information: * The South African inflation is expected to exceed the American inflation by 3% throughout the life of the project. * Lyn Limited cost of capital is currently 13%. * The current spot exchange rate is R17.25/$. 2.1 Advise Lyn Limited which project they should undertake, showing your calculations and assumptions to support your advice. Note: All answers must be typed out and workings must be shown
