FORMATIVE ASSESSMENT 2[100 MARKS] Read the information provided and answer ALL the questions that follow. Question 1(25 Marks) Momo's Steam Laundry needs to install a new automated plant in order to overall its plant modernisation and cost reduction programme. The plant can be leased or purchased. The company's pre-tax cost of capital is 10% and the income tax rate is 30%. Lease: The plant could be leased for R52600 pa. The lessee is responsible for all servicing and maintenance cost amounting to R8000 per annum. The plant has an expected life of six years. However, Momo plans to build an entirely new plant in four years and has no interest in either leasing or owning the proposed plant for more than the stated period. Owning: The plant has an invoice price of R150,000, which will be paid in full in cash upon installation. Annual service fees of R12,000 will be paid at the end of each year over the four years. Depreciation is calculated at 25% per annum using the reducing balance method. Momo plans to sell the plant at the end of year four at its book value. Required: 1.1 Calculate the after-tax cash outflows and the net present value of the cash outflows under each alternative. (23 Marks)1.2 Which alternative would you recommend? Why? (2 Marks) Question 2(25 Marks) Ready 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 A Involves extending the companys production facility in Kwa-Zulu Natal. The plant will cost R98 million and is expected to create an additional annual profit of R9.9 million 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 R975000p.a. Additional fixed cost of R950500. Project B Involves setting up an independent manufacturing facility in Taiwan. The cost of the facility would be an initial outlay 420000000 Taiwan dollars. This would result in: annual profit of 60000000 Taiwan dollars, for the 8 years of the project. The annual fixed costs and variable costs are 16000000 and 15200000 Taiwan dollars respectively. These costs were not included in the profit calculation. Consultant fees of 1325000 Taiwan dollars were incurred and included in the calculation of profit for Project Taiwan. Note: Ready Limited current cost of capital is 15%. The Taiwanese inflation is expected to exceed the South African inflation by 4% p.a. throughout the life of the project. The current spot rate exchange is 4.5 Taiwan dollars to the Rand. Required: Compute the necessary calculations and advise Ready Limited if it is worth investing in neither, in one or both of these two opportunities. (25 Marks