Siyahamba Ltd is a company listed on the Johannesburg Securities Exchange. The company

was established $15$ years ago aimed at addressing the public transport shortages in South Africa.

Siyahamba owns buses and shuttles that are used on a daily basis by commuters across the

country. A recent spate of increased economic conditions and increased competition have

resulted in a decrease in profits over the previous $5$ years. As a result, the directors are of the

opinion that a different revenue stream should be considered in order to increase profits.

The CEO of Siyahamba suggested that the company should diversify and consider investing in a

tyre manufacturing project. If successful, the tyre project will be housed in one of Siyahamba's

premises currently occupied by a tenant. The tenant's lease agreement will have to be

terminated. The tenant currently pays rentals of R$300000$ per annum.

You are the executive assistant to the CEO, and he has requested you to provide a detailed

analysis of the project over four years. He provided you with the following information:

A year ago, market research was conducted at a total cost of R$275000.$ The following was

revealed relating to demand of tyres from external parties:

The project will require an initial investment of R $15000000$ on specialized machinery. SARS

allows wear and tear of $15\%$ per annum on machinery. The machinery will be sold for R$7000$

$000$ at the end of the project.

Siyahamba will use some of the tyres for its bus fleet and avoid paying external suppliers. It

is expected that the company will save R$2500$ per tyre over the next four years. The company

utilizes $300$ bus tyres annually.

Siyahamba will provide managerial services for the project from its head office. The cost of

the services will be as follows:

It is expected that each tyre will be sold for R$2400$ over the life of the project. The company

will incur variable cost of R$2250$ per tyre over the life of the project. Siyahamba will have to

hire a trained machine operator for the project. The operator will earn R$830000$ per annum

over the life of the project.

Assume capital providers require a $16\%$ return and a tax rate of $28\%.$

REQUIRED:

$1\mathrm{.}1$ Calculate the net present value $($NPV$)$ and internal rate of return $($IRR$)$ of the project.

$1\mathrm{.}2$ Based on your calculations above, recommend whether Siyahamba should invest in

the project. $($Provide reasons for your answer$)$