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nvolves extending the company ’ s production facility in Kwa - Zulu Natal. The plant will cost R 9 8 million and is expected to create an additional annual profit of R 9 . 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 R 9 7 5 0 0 0 p . a . • Additional fixed cost of R 9 5 0 5 0 0 . Project B Involves setting up an independent manufacturing facility in Taiwan. The cost of the facility would be an initial outlay 4 2 0 0 0 0 0 0 0 Taiwan dollars. This would result in: • annual profit of 6 0 0 0 0 0 0 0 Taiwan dollars, for the 8 years of the project. • The annual fixed costs and variable costs are 1 6 0 0 0 0 0 0 and 1 5 2 0 0 0 0 0 Taiwan dollars respectively. These costs were not included in the profit calculation. • Consultant fees of 1 3 2 5 0 0 0 Taiwan dollars were incurred and included in the calculation of profit for Project Taiwan. Note: • Ready Limited current cost of capital is 1 5 % . • 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

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nvolves extending the company ’ s production facility in Kwa - Zulu Natal. The plant will cost R 9 8 million and is expected to create an additional annual profit of R 9 . 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 R 9 7 5 0 0 0 p . a . • Additional fixed cost of R 9 5 0 5 0 0 . Project B Involves setting up an independent manufacturing facility in Taiwan. The cost of the facility would be an initial outlay 4 2 0 0 0 0 0 0 0 Taiwan dollars. This would result in: • annual profit of 6 0 0 0 0 0 0 0 Taiwan dollars, for the 8 years of the project. • The annual fixed costs and variable costs are 1 6 0 0 0 0 0 0 and 1 5 2 0 0 0 0 0 Taiwan dollars respectively. These costs were not included in the profit calculation. • Consultant fees of 1 3 2 5 0 0 0 Taiwan dollars were incurred and included in the calculation of profit for Project Taiwan. Note: • Ready Limited current cost of capital is 1 5 % . • 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

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Asked by: Sahab Sharan
Created at: 2025-09-16 21:42:56

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# Investment Appraisal: Ready Limited Expansion Projects This analysis compares two mutually exclusive investment opportunities for Ready Limited: expanding the production facility in KwaZulu-Natal (Project A) and establishing a manufacturing facility in Taiwan (Project B). The goal is to determine, using NPV (Net Present Value), whether the company should invest in neither, one, or both projects. --- ## Project A: KwaZulu-Natal Plant Expansion ### Project Details - **Initial Investment:** R98,000,000 - **Project Life:** 8 years - **Annual Profit (after depreciation):** R9,900,000 - **Depreciation:** Included in profit, straight-line over 8 years - **Share of existing overheads:** R975,000 p.a. (non-incremental) - **Additional fixed cost:** R950,500 p.a. (incremental) - **Cost of Capital:** 15% ### Adjustments #### Exclude Non-Incremental Overheads Overheads borne by head office (R975,000) are not incremental and should be **added back** to profit for NPV calculation. #### Depreciation Depreciation is a non-cash expense and already included in annual profit. Thus, no further adjustment is needed. #### Incremental Fixed Costs Additional fixed costs are already included in the profit. ### Cash Flow Calculation \[ \text{Adjusted Annual Cash Flow} = R9,900,000 + R975,000 = R10,875,000 \] ### NPV Calculation \[ NPV = \sum_{t=1}^{8} \frac{R10,875,000}{(1+0.15)^t} - R98,000,000 \] The present value annuity factor for 8 years at 15%: \[ PVAF = \frac{1 - (1+0.15)^{-8}}{0.15} \approx 4.487 \] \[ NPV = R10,875,000 \times 4.487 - R98,000,000 \approx R48,774,125 - R98,000,000 = -R49,225,875 \] --- ## Project B: Taiwan Manufacturing Facility ### Project Details - **Initial Investment:** TWD 420,000,000 - **Annual Profit (before fixed & variable costs):** TWD 600,000,000 - **Annual Fixed Costs:** TWD 160,000,000 (excluded from profit) - **Annual Variable Costs:** TWD 152,000,000 (excluded from profit) - **Consultant Fees:** TWD 13,250,000 (already included in profit) - **Project Life:** 8 years - **Spot Rate:** 4.5 TWD/ZAR - **Cost of Capital (SA):** 15% - **Taiwanese inflation exceeds SA by:** 4% p.a. ### Adjustments #### Calculate Annual Net Cash Flow \[ \text{Net Cash Flow} = \text{Profit} - \text{Fixed Costs} - \text{Variable Costs} \] \[ = TWD 600,000,000 - TWD 160,000,000 - TWD 152,000,000 = TWD 288,000,000 \] #### Convert Cash Flows to Rand - Initial Outlay in ZAR: \( \frac{TWD 420,000,000}{4.5} = R93,333,333 \) - Annual Cash Flows in ZAR (Year 1): \( \frac{TWD 288,000,000}{4.5} = R64,000,000 \) #### Adjust for Differential Inflation Because Taiwanese inflation is 4% higher, the TWD cash flows will grow at 4% p.a. relative to the Rand. Therefore, discount the Rand equivalent cash flows at \( k = 15\% \): \[ NPV = \sum_{t=1}^{8} \frac{R64,000,000 \times (1.04)^{t-1}}{(1.15)^t} - R93,333,333 \] ##### Calculate Present Value of Growing Annuity \[ PV = C \times \frac{1 - \left( \frac{1+g}{1+k} \right)^n}{k-g} \] Where: - \( C = R64,000,000 \) - \( g = 4\% \) - \( k = 15\% \) - \( n = 8 \) \[ PV = 64,000,000 \times \frac{1 - \left( \frac{1.04}{1.15} \right)^8}{0.15 - 0.04} \] \[ \left( \frac{1.04}{1.15} \right)^8 = (0.9043)^8 \approx 0.472 \] \[ PV = 64,000,000 \times \frac{1 - 0.472}{0.11} \] \[ PV = 64,000,000 \times \frac{0.528}{0.11} \approx 64,000,000 \times 4.8 = R307,200,000 \] \[ NPV = R307,200,000 - R93,333,333 = R213,866,667 \] --- ## Summary Table | Project | NPV (ZAR) | Decision | |-------------|------------------|------------------| | KZN (A) | -R49,225,875 | **Reject** | | Taiwan (B) | R213,866,667 | **Accept** | --- ## Recommendation - **Accept Project B (Taiwan):** The NPV is substantially positive (\~R213.9 million). - **Reject Project A (KwaZulu-Natal):** The NPV is negative (\~R49.2 million). - **Invest in Project B only.** --- ## Assumptions and Notes - All cash flows occur at year-end. - Exchange rate risk is limited to inflation differentials. - No tax, salvage value, or working capital adjustments were required. - Only incremental cash flows are considered. --- ### Further Considerations - Confirm tax implications, if any. - Consider political and operational risks in Taiwan. - Hedge exchange rate risk if possible. --- **If you have further data (e.g., tax rates or working capital), provide it for a more precise analysis.**

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