Chapter 15, Problem 1BIC

DD Limited, South Africa, is a specialist manufacturer of electronic scooters. In seeking to expand its operations, it could acquire a French subsidiary company, AAA Limited, or set up a new division in its home market. The relevant figures for these two options are:Set up new division at home R andCost of setting up premises 2 2 440 000Cost of machinery 8 7 00 000Annual sales 33 000 000Annual variable cost 1 4 050 000Additional head office expenses 1 300 000Existing head office expenses 3 220 000Depreciation: machinery 10% on cost annually 8 7 0 000Acquisition EuroAcquire shares from existing shareholders 28 000 000Redundancy costs 5 000 000Annual Sales 39 000 000Annual variable costs 18 000 000Annual fixed costs 10 000 000Consultants fees 750 000Additional information:- The project is expected to last for 7 years.- DD Limited, current cost of capital is 10%.- The French inflation is expected to be below the South African inflation by 1% per year, throughout the life of…

Pegasus Telecommunications Ltd (PTL) is considering rolling out a new cable Internet service. PTL is a taxable, publicly listed corporation operating in Australia. PTL’s management is in the process of analysing the project using the net present value method, and as a junior analyst you have been asked to gather the relevant information. For each of the following items explain briefly (no more than 1 sentence) why that item is or is not relevant to the NPV computation: a. Last month the marketing department ran a focus group to determine consumer interest in the new service. An invoice for $2,500 has just arrived from the consultants involved in running the focus group. b. PTL headquarters allocates central company costs to departments at a rate of $5,000 per employee per year. c. PTL’s bank will charge an interest rate of 12% p.a. compounded monthly on the loan required to purchase the necessary hardware. d. Equipment purchased will be depreciated straight line over 5 years. e. The…

Agricare Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several on-line data services, then either displays the information on a screen or stores it for later retrieval by the firm's brokers. The system also permits customers to call up current quotes on terminals in the lobby.The equipment costs GHS 1,000,000, and, if it were purchased, Agricare could obtain a term loan for the full purchase price at a 10 percent interest rate. Although the equipment has a six-year useful life, it is classified as a special-purpose computer, so it falls into a straight-line depreciation. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of GHS 20,000 per year, payable at the beginning of each year. The equipment would be sold after 4 years, and the best estimate of its residual value at that time is GHS 200,000. However, since real-time…