QUESTION $5$:

Read the case study$/$ scenario below and answer the questions based on the

case study.

LDF Pharmaceuticals Limited $($LDF$)$ is a company listed on the JSE. They are one of the

leading pharmaceutical organisations assisting in procuring and producing the COVID$-19$

vaccine. They also sourced multiple items of personal protective clothing during the

outbreak of the virus and as a result experienced significant growth during the $2020$ financial

year. As a result, they are expanding their operations and are in the process of deciding

which project would most suit their operations.

Below is an extract of various information pertaining to a Project known as $$Project Generic

Medication Supply$$:

$$ The cost of the new investment is R$20$million and all assets used specifically for the

project can be disposed of at the end of this project$$s life for R$500000.$ The life of the

project is five years.

$$ Existing assets to be used on the project have carrying amounts of R$12$ million.

$$ The revenue expected to be generated per annum is R$21$million.

$$ The variable costs are expected to be generated per annum is R$4$million.

$$ The fixed costs are made up of the following:

Description Amount $($R$)$

Head Office Allocation $1000000$

Depreciation $500000$

Rental space $1000000$

Maintenance costs $3500000$

The maintenance cost above is provided to the manufacturer as part of a service plan

for this specific machine. The annual fee is fixed and will not increase with inflation.

$$ The tax allowance on all the assets is equal to the depreciation on an annual basis.

$$ The inflation rate is $7\mathrm{.}5\%$ and the WACC rate is $15\%.$

$$ Due to the nature of the project, the South African government will provide R$11$million

per year as a subsidy to facilitate the transaction. This amount is a fixed fee over a

five$-$year period and will not be subject to inflation.

$$ The introduction of the project does not harmonise with LDF$$s current business model.

$$ The medication will be sourced from a firm whose business address is in a tax haven.

Upon further investigation, it was discovered that the ultimate holding company is a

Russian$-$based organisation with various ties to the Russian government.

Required

Based on the information provided above, evaluate whether LDF should invest in

this new project. Your answer should include calculations wherever necessary