REQUIRED:

a. Present the expected relevant cashflows from the project for Group Altmann if the new equipment was to be purchased.

b. Becker has asked you to analyse whether investing in the new equipment will enhance shareholders wealth. Make a recommendation to Becker, supported by clear calculations, as to whether the investment should be made in the new equipment.

One early afternoon in March 2020, Alex Becker was at work all by himself at Group Altmann's headquarters in Frankfurt, Germany. Normally, his office would be buzzing with activities at this time of the year; however, most of his staff members were self-isolating due to Covid-19 and the place looked deserted. This has not, however, dampened Becker's enthusiasm in getting things done. If anything, this has only increased his appetite to pore over the financial documents that he had just received. The previous week, Becker had requested additional financial information about an investment proposal from Altmann-South Africa (Altmann-SA), a wholly owned subsidiary that operated a manufacturing facility and a regional sales office in Johannesburg, South Africa. Becker, who is a financial analyst at Altmann, is keenly interested in cross-border projects, particularly since Altmann started focusing on emerging markets several years earlier. The South African investment proposal seeks to buy and install new automated machinery to recycle and remanufacture toner cartridges used in printers. Cartridge recycling had become an important part of Altmann's business in many markets and promised continued growth. Analysts predict that consumer demand for recycled cartridges would be increasing in the coming years. Altmann-SA's Johannesburg plant began its cartridge recycling program in 2017. Existing recycling process consists of a series of labour-intensive manual operations aided by simple machine and hand tools. The investment proposal calls for replacing this process with new automated machinery from Germany with an estimated cost of 2.5 million South African rand (ZAR) (approximately 156,000) fully installed. As described in the project summary, Altmann-SA expects to realize substantial savings in labour and materials almost immediately. Though the proposed expenditure is not substantial by Altmann's standard, a discounted cash flow analysis for all such investments is still required. Finally, a corporate review takes place in headquarters in Frankfurt before a decision is made on whether to invest or not. Becker is assigned to perform an analysis of the investment proposal and make a recommendation to his superior as to whether or not to accept the proposal. Global Operations: Group - Altmann Group Altmann is a global manufacturer of printers, copiers, fax machines, and other document production equipment. It also provides after-sales service contracts constituting about 18% of overall revenue. Company sales for 2020 were slightly lower than the previous year and the company registered a small net loss for the year. Table 1 presents selected consolidated financial data for Group Altmann. Altmann's low profitability was typical of the industry in 2020. One bright spot in the company's outlook, however, was its growth in several emerging markets, including the so- called BRIC economies of Brazil, Russia, India, and China. Altmann had been a global firm for years, but did not move aggressively into emerging markets until 2014-2015. This was later than some of its competitors. This meant that Altmann's market share lagged in some regions but it helped the company to avoid some of its competitors' earlier mistakes. Table 1: Group Altmann - Selected Consolidated Financial Data (millions of Euros, except as noted otherwise) 2016 2017 2018 2019 2020 Sales 4575.5 4618.3 5365.3 5342.7 5018.0 Operating income 224.9 245.3 259.4 283.8 91.8 Net income 128.6 132.4 91.8 128.6 (1.0) Total assets Total debt Equity 3668.2 756.3 1297.7 4693.5 867.6 1411.5 4349.5 919.4 1244.5 4147.3 924.0 1229.2 4213.9 991.0 1173.9 Capital expenditures Depreciation R&D expenditures 351.1 232.5 70.2 361.4 229.3 72.3 142.6 321.1 28.5 150.0 314.1 30.0 131.4 292.5 26.3 Earnings/share (Euros) Dividend/share (Euros) Return on sales Return on equity 1.5 1.0 2.8% 9.9% 1.6 1.0 2.9% 9.4% 1.1 1.0 1.7% 7.4% 1.5 1.1 2.4% 10.5% 0.0 1.1 0.0% -0.1% The company's international operations were conducted primarily through a network of subsidiaries, which operated mostly medium-sized regional factories in five countries around the world. In 2020, subsidiaries outside the European Union recorded about half of Altmann's sales and generated slightly less than 40% of pre-tax income. Altmann competed in a relatively mature market, and its chief competitors were both established multinational companies - some of which had developed their consulting and other after-sales services businesses to a higher level than had Altmann - as well as smaller players serving niche markets. While Altmann marketed and sold its products across the full spectrum of industries, it had enjoyed particular success in financial services, health care, and government sectors. Operations in Johannesburg: Altmann-SA According to Altmann's CEO Steffi Graf, "We were attracted to South Africa for the same reason we were attracted to other emerging markets like Russia and China. We wanted to diversify our operations and believed we needed to establish a strong presence in places besides Europe and the United States." The manufacturing facility in Johannesburg was located near a small research and design facility, also owned by Altmann. While many product specifications for Altmann's equipment were formulated at the corporate offices in Frankfurt, Germany, it was customary for regional subsidiaries to conduct fine-tuning research and design activity to tailor the product more closely to local consumers' preferences. Roughly half of the products produced in the Johannesburg plant were sold in South Africa and were distributed through large office-product retailers, department stores, as well as small specialty shops, the remaining half were exported to other African and South American countries where Altmann had no manufacturing presence. Manufacturing inputs were sourced locallyand virtually all of the plant's employees were South African citizens. In the summer of 2020 gross output at Altmann-SA was running at only about 80% of planned capacity. Nevertheless, plant records indicated that there was a sizable increase in demand for recycled printer and toner cartridges. Altmann-SA's "Lovely Planet Programme was started in 2016 to provide low-cost recycling services to all its distributors and customers. Under the terms of users' service contracts, when cartridges reached the end of their useful lives, they could be returned to the Allmann facility in exchange for a 28% discount on the purchase of a like number of new cartridges. Altmann pledged to recycle and remanufacture all returned toner and printer cartridges. As the number of cartridges returned for recycling increased, Altmann-SA management needed to hire and train more employees to carry out the labour-intensive task required to recycle cartridges. Johannesburg plant manager Wayne Parnell admitted that - though he was happy to see the cartridges coming back in - handling the recycling process was being more and more expensive due to higher labour costs. He was also concerned that, once other operations returned to full capacity, the extra volume of recycling would be a problem. Cost Savings from the Proposed New Equipment The new equipment could process the Johannesburg plant's projected volume with considerable savings in both direct labour and material costs (due to lower wastage). It also would require only minimal maintenance expenditures compared to the equipment it replaced, and no significant change in working capital. Table 2 compares projected operating data for the existing recycling process and the proposed automated process, assuming future South African inflation of 7% per year. Table 2: Comparison of Projected Operating Data for Different Recycling Processes (thousands of rands, unless noted otherwise) 2021 2022 2023 2024 2025 Manual Unit volume (000s) Materials Direct Labour Overhead Total 496 847.224 1,672,776 2.520,000 5.040,000 546 997,183 1,968,857 2.696,400 5,662,440 600 1,173,684 2,317,345 2,885,148 6,376,177 660 1,381,426 2,727,515 3,087,108 7,196,050 660 1.478.126 2,918,441 3,303,206 7.699,773 1.71 3.37 1.83 3.61 1.96 3.86 2.09 4.13 2.24 4.42 Materials/unit Direct labour/unit Automatic Unit volume (000s) Materials Direct Labour Overhead 496 762.502 669.110 2.349.317 546 897,464 787,543 2.513,769 600 1,056,316 926,938 2,689,732 660 1,243,283 1,091,006 2,878,014 660 1.330.313 1,167,376 3,079,475 Total 3.780.929 4,198,776 4,672,986 5.212,303 5.577.164 Materials/unit Direct labour/ unit 1.54 1.35 1.64 1.44 1.76 1.54 1.88 1.65 2.02 1.77 The new equipment would have a useful life of 5 years and would be depreciated under the straight-line method for both tax and financial reporting purposes. The manual equipment being replaced had been properly maintained and would last for another 5 years; it had a book and tax written-down value of 875,000 rands and two years of straight-line depreciation remaining. However, its market value was thought to be lower, at about 675,000 rands. After considering Group Altmann's consolidated tax position, Becker determined that his analysis would use South Africa's corporate tax rate of 35%. Further additional information is available below: i) 70,000 rands has already been spent researching the feasibility of the new equipment and its potential impact on cash flows. ii) Real interest rates across all countries are assumed to be the same. iii) Annual inflation rates in Germany and South Africa are 2% and 7% respectively and they are not expected to change in the foreseeable future. iv) The spot exchange rate is ZAR 15.99 / EUR . Expected exchange rates (ZAR / EUR) for year-end 2021 through 2025 are 16.77; 17.60; 18.46; 19.36; and 20.31 respectively. v) Historically, Group Altmann's variance of the market returns has been 55% and the covariance of the firm's returns with that of the market has been 50%. vi) The debt to equity ratio, at market values, is 38% and is expected to remain at this level. vii)Group Altmann's cost of debt is 5.5%. viii) Assume a risk free rate of 2.5%; market returns of 10.4%; and corporate tax rate of 35%. ix) For tax purposes, assume depreciation and capital allowance amount to be the same. One early afternoon in March 2020, Alex Becker was at work all by himself at Group Altmann's headquarters in Frankfurt, Germany. Normally, his office would be buzzing with activities at this time of the year; however, most of his staff members were self-isolating due to Covid-19 and the place looked deserted. This has not, however, dampened Becker's enthusiasm in getting things done. If anything, this has only increased his appetite to pore over the financial documents that he had just received. The previous week, Becker had requested additional financial information about an investment proposal from Altmann-South Africa (Altmann-SA), a wholly owned subsidiary that operated a manufacturing facility and a regional sales office in Johannesburg, South Africa. Becker, who is a financial analyst at Altmann, is keenly interested in cross-border projects, particularly since Altmann started focusing on emerging markets several years earlier. The South African investment proposal seeks to buy and install new automated machinery to recycle and remanufacture toner cartridges used in printers. Cartridge recycling had become an important part of Altmann's business in many markets and promised continued growth. Analysts predict that consumer demand for recycled cartridges would be increasing in the coming years. Altmann-SA's Johannesburg plant began its cartridge recycling program in 2017. Existing recycling process consists of a series of labour-intensive manual operations aided by simple machine and hand tools. The investment proposal calls for replacing this process with new automated machinery from Germany with an estimated cost of 2.5 million South African rand (ZAR) (approximately 156,000) fully installed. As described in the project summary, Altmann-SA expects to realize substantial savings in labour and materials almost immediately. Though the proposed expenditure is not substantial by Altmann's standard, a discounted cash flow analysis for all such investments is still required. Finally, a corporate review takes place in headquarters in Frankfurt before a decision is made on whether to invest or not. Becker is assigned to perform an analysis of the investment proposal and make a recommendation to his superior as to whether or not to accept the proposal. Global Operations: Group - Altmann Group Altmann is a global manufacturer of printers, copiers, fax machines, and other document production equipment. It also provides after-sales service contracts constituting about 18% of overall revenue. Company sales for 2020 were slightly lower than the previous year and the company registered a small net loss for the year. Table 1 presents selected consolidated financial data for Group Altmann. Altmann's low profitability was typical of the industry in 2020. One bright spot in the company's outlook, however, was its growth in several emerging markets, including the so- called BRIC economies of Brazil, Russia, India, and China. Altmann had been a global firm for years, but did not move aggressively into emerging markets until 2014-2015. This was later than some of its competitors. This meant that Altmann's market share lagged in some regions but it helped the company to avoid some of its competitors' earlier mistakes. Table 1: Group Altmann - Selected Consolidated Financial Data (millions of Euros, except as noted otherwise) 2016 2017 2018 2019 2020 Sales 4575.5 4618.3 5365.3 5342.7 5018.0 Operating income 224.9 245.3 259.4 283.8 91.8 Net income 128.6 132.4 91.8 128.6 (1.0) Total assets Total debt Equity 3668.2 756.3 1297.7 4693.5 867.6 1411.5 4349.5 919.4 1244.5 4147.3 924.0 1229.2 4213.9 991.0 1173.9 Capital expenditures Depreciation R&D expenditures 351.1 232.5 70.2 361.4 229.3 72.3 142.6 321.1 28.5 150.0 314.1 30.0 131.4 292.5 26.3 Earnings/share (Euros) Dividend/share (Euros) Return on sales Return on equity 1.5 1.0 2.8% 9.9% 1.6 1.0 2.9% 9.4% 1.1 1.0 1.7% 7.4% 1.5 1.1 2.4% 10.5% 0.0 1.1 0.0% -0.1% The company's international operations were conducted primarily through a network of subsidiaries, which operated mostly medium-sized regional factories in five countries around the world. In 2020, subsidiaries outside the European Union recorded about half of Altmann's sales and generated slightly less than 40% of pre-tax income. Altmann competed in a relatively mature market, and its chief competitors were both established multinational companies - some of which had developed their consulting and other after-sales services businesses to a higher level than had Altmann - as well as smaller players serving niche markets. While Altmann marketed and sold its products across the full spectrum of industries, it had enjoyed particular success in financial services, health care, and government sectors. Operations in Johannesburg: Altmann-SA According to Altmann's CEO Steffi Graf, "We were attracted to South Africa for the same reason we were attracted to other emerging markets like Russia and China. We wanted to diversify our operations and believed we needed to establish a strong presence in places besides Europe and the United States." The manufacturing facility in Johannesburg was located near a small research and design facility, also owned by Altmann. While many product specifications for Altmann's equipment were formulated at the corporate offices in Frankfurt, Germany, it was customary for regional subsidiaries to conduct fine-tuning research and design activity to tailor the product more closely to local consumers' preferences. Roughly half of the products produced in the Johannesburg plant were sold in South Africa and were distributed through large office-product retailers, department stores, as well as small specialty shops, the remaining half were exported to other African and South American countries where Altmann had no manufacturing presence. Manufacturing inputs were sourced locallyand virtually all of the plant's employees were South African citizens. In the summer of 2020 gross output at Altmann-SA was running at only about 80% of planned capacity. Nevertheless, plant records indicated that there was a sizable increase in demand for recycled printer and toner cartridges. Altmann-SA's "Lovely Planet Programme was started in 2016 to provide low-cost recycling services to all its distributors and customers. Under the terms of users' service contracts, when cartridges reached the end of their useful lives, they could be returned to the Allmann facility in exchange for a 28% discount on the purchase of a like number of new cartridges. Altmann pledged to recycle and remanufacture all returned toner and printer cartridges. As the number of cartridges returned for recycling increased, Altmann-SA management needed to hire and train more employees to carry out the labour-intensive task required to recycle cartridges. Johannesburg plant manager Wayne Parnell admitted that - though he was happy to see the cartridges coming back in - handling the recycling process was being more and more expensive due to higher labour costs. He was also concerned that, once other operations returned to full capacity, the extra volume of recycling would be a problem. Cost Savings from the Proposed New Equipment The new equipment could process the Johannesburg plant's projected volume with considerable savings in both direct labour and material costs (due to lower wastage). It also would require only minimal maintenance expenditures compared to the equipment it replaced, and no significant change in working capital. Table 2 compares projected operating data for the existing recycling process and the proposed automated process, assuming future South African inflation of 7% per year. Table 2: Comparison of Projected Operating Data for Different Recycling Processes (thousands of rands, unless noted otherwise) 2021 2022 2023 2024 2025 Manual Unit volume (000s) Materials Direct Labour Overhead Total 496 847.224 1,672,776 2.520,000 5.040,000 546 997,183 1,968,857 2.696,400 5,662,440 600 1,173,684 2,317,345 2,885,148 6,376,177 660 1,381,426 2,727,515 3,087,108 7,196,050 660 1.478.126 2,918,441 3,303,206 7.699,773 1.71 3.37 1.83 3.61 1.96 3.86 2.09 4.13 2.24 4.42 Materials/unit Direct labour/unit Automatic Unit volume (000s) Materials Direct Labour Overhead 496 762.502 669.110 2.349.317 546 897,464 787,543 2.513,769 600 1,056,316 926,938 2,689,732 660 1,243,283 1,091,006 2,878,014 660 1.330.313 1,167,376 3,079,475 Total 3.780.929 4,198,776 4,672,986 5.212,303 5.577.164 Materials/unit Direct labour/ unit 1.54 1.35 1.64 1.44 1.76 1.54 1.88 1.65 2.02 1.77 The new equipment would have a useful life of 5 years and would be depreciated under the straight-line method for both tax and financial reporting purposes. The manual equipment being replaced had been properly maintained and would last for another 5 years; it had a book and tax written-down value of 875,000 rands and two years of straight-line depreciation remaining. However, its market value was thought to be lower, at about 675,000 rands. After considering Group Altmann's consolidated tax position, Becker determined that his analysis would use South Africa's corporate tax rate of 35%. Further additional information is available below: i) 70,000 rands has already been spent researching the feasibility of the new equipment and its potential impact on cash flows. ii) Real interest rates across all countries are assumed to be the same. iii) Annual inflation rates in Germany and South Africa are 2% and 7% respectively and they are not expected to change in the foreseeable future. iv) The spot exchange rate is ZAR 15.99 / EUR . Expected exchange rates (ZAR / EUR) for year-end 2021 through 2025 are 16.77; 17.60; 18.46; 19.36; and 20.31 respectively. v) Historically, Group Altmann's variance of the market returns has been 55% and the covariance of the firm's returns with that of the market has been 50%. vi) The debt to equity ratio, at market values, is 38% and is expected to remain at this level. vii)Group Altmann's cost of debt is 5.5%. viii) Assume a risk free rate of 2.5%; market returns of 10.4%; and corporate tax rate of 35%. ix) For tax purposes, assume depreciation and capital allowance amount to be the same