QUESTION FOUR $(25$ Marks$)$

Howick $($Ltd$),$ South Africa, is a specialist manufacturer of security doors and gates. In seeking to expand its operations, it has the opportunity to acquire a French subsidiary company, Hillcrest 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 $42000000$

Cost of machinery $18000000$

Annual sales $25000000$

Annual variable cost $7000000$

Additional head office expenses $1000000$

Existing head office expenses $800000$

Depreciation $2500000$

Acquisition Euro

Acquire shares from existing shareholders $14000000$

Annual sales $8000000$

Annual variable costs $4000000$

Annual fixed costs $1000000$

Consultant fees $500000$

Additional information:

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

$$ Howick $($Ltd$),$ current cost of capital is $12\%.$

$$ The French 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$14$ to the Euro $().$

Required:

$4\mathrm{.}1$ Compute the necessary calculations and advise Howick Limited if it is worth investing in neither, in one or both of these two opportunities. $(25$ Marks$)$