Zola Budd Capital Project

Page 6 of 8 MAC3761 Test 4/September 2023

While the negotiations with the GBS team were underway, the Investment Board embarked on a breakaway strategy session where it wanted to consider an alternative capital project, Zola Budd, as a different way of entering the highly competitive passenger transportation industry. The session was facilitated by Strata Taxi Consultants who are the market leaders in taxi industry research. They also have strong affiliations with different taxi associations across the country. They have just submitted an invoice for R26 million for the strategy session they hosted which is already due. Subsequent to the strategy session, the Investment Board has established the following:

As an alternative to GBS, Bigvest can purchase a fleet of brand-new minibuses from Toyota Commercial Limited with a budget of R230 million payable upfront in full. Each minibus is diesel-fuelled, carries up to nine passengers and costs R1 150 000. For the next 5 years, these minibuses will be used for long distance passenger transportation (inter-province travel) as they offer great comfort to travellers. At the end of the 5-year period, these minibuses will be sold at R150 000 each. Each minibus comes with a free 3-year/180 000 kilometres (km) maintenance plan worth R60 000 (viz. Bigvest will have its fleet serviced for free for the next 3 years or up until the minibus has reached 180 000 km, whichever occurs first). Bigvest will extend the maintenance plan upon expiry on the same terms and cost. The extended maintenance plan is paid upon expiry of the original maintenance plan.

Passengers using minibuses need to book their bus ticket in advance, anything from a day before the trip up to 60 days. The bookings will be done on Bigvest Companys existing website or via an App that will be developed and launched at the start of the project at a cost of R4,6 million. Alterations to the website will be made by one of the Head Office full-time IT specialists who is on a fixed annual salary of R740 000 (an external IT consulting company would get paid a once of R140 000 for similar work). Once-off graphics, copyright administration and other website-related costs are expected to be R60 000. Upfront permit registration, licensing and taxi association fees will cost R290 000 for the entire fleet.

On average, each minibus will generate about R1,02 million annually in revenue, and the revenue is expected to remain constant until the end of Year 3. Revenue will increase by 4,9 % in Year 4 and remain at that level for the foreseeable future. Minibus drivers will be paid an annual salary of R250 000 each, which also includes accommodation and out of town costs they might incur. The minibus drivers will be on a fixed 5-year term contract, and each driver will be assigned to his/her own minibus for the duration of the contract.

Each minibus is expected to travel 50 000 km per annum. The fuel consumption of each minibus is 8,5 litres per 100 km and this is not expected to change for the life of the minibuses. Bigvest already has fuel storage tanks in major depots across the country for the refilling of its logistics business fleet. Fuel is usually kept at sufficient levels and therefore, for the next 5 years, the minibuses will also make use of these depots to refill. Diesel is currently sold at an average price of R22,20 per litre throughout the country (however, Bigvest buys its diesel at R20 per litre). These prices are forecasted to remain the same for the next 5 years. Other operating costs (insurance, repairs and maintenance, road tariffs, additional personnel, etc.) are estimated at 20% of gross revenue.

Assume the South African Revenue Services (SARS) will allow a wear and tear of 6 years on brand new minibuses. For tax purposes, assume all income and expenses (including other capitalised expenses) are fully taxable and deductible in the same period the income is received, or the expense is paid, unless stated otherwise. Ignore working capital investment, unless specifically addressed above.

Using relevant investment appraisal method/s, determine whether Bigvest Company should invest in Zola Budd Project, with reference to the minimum investment criteria.