Apple 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 South Africa
Involves extending the company’s production facility in Kwa-Zulu Natal. The plant will cost R91 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 R975 000p.a.
· Additional fixed cost of R950 500.
Project Taiwan
Involves setting up an independent manufacturing facility in Taiwan. The cost of the facility would be an initial outlay
320 000 000 Taiwan dollars. This would result in:
· annual profit of 60 000 000 Taiwan dollars, for the 8 years of the project.
· The annual fixed costs and variable costs are 16 000 000 and 15 200 000 Taiwan dollars respectively. These costs
were not included in the profit calculation.
· Consultant fees of 1 325 000 Taiwan dollars were incurred and included in the calculation of profit for Project Taiwan.
Note:
· Apple 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.
Compute the necessary calculations and advise Apple Limited if it is worth investing in neither, in one or both of these two
opportunities.
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