ALL questions.

QUESTION $1$

$(25$ Marks$)$

Burnly Limited, South Africa, is a specialist manufacturer of security doors and gates. In seeking to expand its operations, it has the opportunity to acquire a Dutch subsidiary company, Crystal Palace, or set up a new division in its home market.

The relevant figures for these two options are:

Set up new division at home

Cost of setting up premises

Cost of machinery

Annual sales

Annual variable cost

Additional head office expenses

Existing head office expenses

Depreciation: machinery $10\%$ on cost annually

Acquisition

Acquire shares from existing shareholders

Redundancy costs

Annual Sales

Annual variable costs

Annual fixed costs

Consultants fees

Rand

$60000000$

$36000000$

$46000000$

$12000000$

$2000000$

$1600000$

$6000000$

Euro

$22000000$

$7000000$

$38000000$

$19000000$

$7000000$

$14000000$

Additional information:

The project is expected to last for $10$ years.

Burnly Limited, current cost of capital is $12\%.$

The Dutch inflation is expected to be below the South African inflation by $1\%$ per year, throughout the life of this investment.

The current exchange spot rate is R$13$ to the Euro $().$

Required:

$1\mathrm{.}1$ Make all necessary calculations for the two options.

$(22$ marks$)$

$1\mathrm{.}2$ Advise Burnly Limited on the viability of these two opportunities.

$(3$ marks$)$