Compute the projected annual cash flow in Rands. 

(b) Compute the projected operating gains/losses over the four-year horizon as the discounted present value of change in cash flows, which is due to the Pula depreciation, from the benchmark case presented in Exhibit 1. (8)

(c) Demonstrate using calculations, what actions, if any, can Puleng (Pvt) Ltd take to mitigate the 

Exhibit 3 Summary of Operating
exposure Effect of Pula depreciation on
Puleng (Pvt) Ltd Variables..

Question 4 125 marks] A South African company has a
wholly owned subsidiary, Puleng (Pvt) Lid, that
manufactures and sells printers in the Bots.

projected operating losses due to the Pula depreciation? (5)

Transcribed Image Text:

Exhibit 3 Summary of Operating exposure Effect of Pula depreciation on Puleng (Pvt) Ltd Case 3 Case 1 1.40 1.40 696 722 Variables Exchange Rate (R/P) Unit Variable cost (P) Unit Sales Price (P) Sales Volume (units) Annual Cash flow (R) Annual cash flow (P) 4-year present value (R) Benchmark Case 1.60 650 1.000 50 000 7 250 000 11 600 000 33 118 000 Case 2 1.40 696 1 143 50 000 9 675 000 13 545 000 38 671 000 5 553 000 1 080 1,000 50 000 40 000 6 100 000 8 540 000 24 382 000 -8 736 000 5 660 000 7 924 000 22 623 000 -10 495 000 Operating gains/loss (R) a- The discounted present value of rand cash flows was computed over a four-year period using a 15% discount rate. A constant cash flow is assumed for each of four years. b- Operating gains or losses represent the present value of change in cash flows, which is due to Pula depreciation, from the benchmark case. Exhibit 3 summarises the projected operating exposure effect of the Pula depreciation on Puleng (Pvt) Ltd. For expositional purposes it is assumed here that a change in exchange rate will have effect on the firm's operating cash flow for four years. Exhibit 3 provides, among other things, the four-year present values of operating cash flows (over a four-year period) for the benchmark case that are due to the exchange rate change. In Exhibit 2, for instance, the firm expects to experience an operating loss of R10 495 000 due to the Pula depreciation. Consider Exhibit 2 of Puleng (Pvt) Ltd. Now, assume that the Pula is expected to depreciate to R1.50 per Pula from the current level of R1.60 per Pula. This implies that the Pula cost of the imported part, i.e. B2B's printer cartridges, is P341 (=R512/R1.50). Other variables, such as the unit sales volume and the Botswana inflation rate remains the same as in Exhibit 2. Exhibit 3 Summary of Operating exposure Effect of Pula depreciation on Puleng (Pvt) Ltd Case 3 Case 1 1.40 1.40 696 722 Variables Exchange Rate (R/P) Unit Variable cost (P) Unit Sales Price (P) Sales Volume (units) Annual Cash flow (R) Annual cash flow (P) 4-year present value (R) Benchmark Case 1.60 650 1.000 50 000 7 250 000 11 600 000 33 118 000 Case 2 1.40 696 1 143 50 000 9 675 000 13 545 000 38 671 000 5 553 000 1 080 1,000 50 000 40 000 6 100 000 8 540 000 24 382 000 -8 736 000 5 660 000 7 924 000 22 623 000 -10 495 000 Operating gains/loss (R) a- The discounted present value of rand cash flows was computed over a four-year period using a 15% discount rate. A constant cash flow is assumed for each of four years. b- Operating gains or losses represent the present value of change in cash flows, which is due to Pula depreciation, from the benchmark case. Exhibit 3 summarises the projected operating exposure effect of the Pula depreciation on Puleng (Pvt) Ltd. For expositional purposes it is assumed here that a change in exchange rate will have effect on the firm's operating cash flow for four years. Exhibit 3 provides, among other things, the four-year present values of operating cash flows (over a four-year period) for the benchmark case that are due to the exchange rate change. In Exhibit 2, for instance, the firm expects to experience an operating loss of R10 495 000 due to the Pula depreciation. Consider Exhibit 2 of Puleng (Pvt) Ltd. Now, assume that the Pula is expected to depreciate to R1.50 per Pula from the current level of R1.60 per Pula. This implies that the Pula cost of the imported part, i.e. B2B's printer cartridges, is P341 (=R512/R1.50). Other variables, such as the unit sales volume and the Botswana inflation rate remains the same as in Exhibit 2.

Answer rating: 100% (QA)

a Compute the projected annual cash flow in Rands Given Sales 50000 units at P1000unit P50000000 Variable Costs 50000 units at P650unit P32500000 Fixe... View the full answer