FORMATIVE ASSESSMENT $1$

$[100$ MARKS$]$

Read the information and answer ALL the questions that follow.

Question $1$

$(25$ Marks$)$

Apple Limited, South Africa, $is$ a specialist manufacturer $of$ security doors and gates. $In$ seeking $to$ expand its operations, $it$ could acquire a Dutch subsidiary company, Purple Guard, $or$ set $up$ a new division $in$ its home market.

The relevant figures for these two options are:

Set $up$ new division $at$ home

Rand

$*$

Cost $of$ setting $up$ premises

$35000000$

$*$

Cost $of$ machinery

$18000000$

$*$

Annual sales

$41500000$

$*$

Annual variable cost

$13000000$

$*$

Head office expenses

$o$

The Head office expense includes existing head office expense $ofR1500000$

$6000000$

$*$

Depreciation: machinery $10\%oncost$ annually

$1800000$

Acquisition

Euro

$*$

Acquire shares from existing shareholders

$15000000$

$*$

Redundancy costs

$6000000$

$*$

Annual Sales

$32000000$

$*$

Annual variable costs

$16000000$

$*$

Annual fixed costs

$6000000$

$*$

Consultants fees

$5000500$

Additional information:

$-$

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

$-$

Apple Limited, current cost $of$ capital $is13\%.$

$-$

The Dutch inflation $is$ expected $tobe$ below the South African inflation $by2\%$ per year, throughout the life $of$ this investment.

$-$

The current exchange spot rate $isR20to$ the Euro $().$

Required:

$1\mathrm{.}1$ Make all necessary calculations for the two options and advise Apple Limited $on$ the viability $of$ these two opportunities