QUESTION TWO $(25$ Marks$)$

Gringo Limited is a South African based manufacturer of an award$-$winning generator. The company is currently investigating

two investment projects. The information is given below:

Project S$.$A

Involves extending the company$$s production facility in Cape Town. The plant will cost R$42$ million and is expected to create

an additional annual profit of R$3\mathrm{.}8$ 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 R$745000$p$.$a$.$

$$ Additional fixed cost of R$800500.$

Project T$.$T

Involves setting up an independent manufacturing facility in Taiwan. The cost of the facility would be an initial outlay $180000$

$000$ Taiwan dollars. This would result in:

$$ annual profit of $75000000$ Taiwan dollars, for the $8$ years of the project.

$$ The annual fixed costs and variable costs are $8000000$ and $6200000$ Taiwan dollars respectively. These costs were

not included in the profit calculation.

$$ Consultant fees of $525000$ Taiwan dollars were included in the calculation of profit for Project T$.$T$.$

Note:

$$ Gringo 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 $4\mathrm{.}2$ Taiwan dollars to the Rand.

Required:

Compute the necessary calculations and advise Gringo Limited if it is worth investing in neither, in one or both of these two opportunities.