Question
Southhampton Traders Limited is a South African based manufacturer of Generators, an award-winning generator. The company is currently investigating two investment projects. The information is
Southhampton Traders Limited is a South African based manufacturer of Generators, an award-winning generator. The company is currently investigating two investment projects. The information is given below: Project Danny Involves extending the companys production facility in Cape Town. The plant will cost R32 000 000 and is expected to create an additional annual profit of R3 500 000 for the 8 years life of the project. The following expenses were included in the annual profit: - Depreciation was calculated on the straight-line method, over the life of project. - Share of existing overheads, borne by head office amounting to R40 000p.a. - Additional fixed cost of R65 000 p.a. Project Ings Involves setting up an independent manufacturing facility in Taiwan. The cost of the facility would be an initial outlay 45 300 000 Taiwan dollars. This would result in: - annual profit of 28 000 000 Taiwan dollars, for the 8 years of the project. - The annual fixed costs and variable costs are 2 000 000 and 1 200 000 Taiwan dollars respectively. These costs were not included in the profit calculation. - Consultant fees of 620 000 Taiwan dollars were included in the calculation of profit for Project Ings. Note: - Southhampton Traders Limited current cost of capital is 11%. - The Taiwanese inflation is expected to exceed the South African inflation by 2% p.a. throughout the life of the project. - The current spot rate exchange is 2.8 Taiwan dollars to the Rand. Compute the necessary calculations and advise Southhampton Traders Limited if it is worth investing in neither, in one or both of these two opportunities.
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