Answer Happy

QUESTION FOUR Sherwood Limited is an American based manufacturerof heavy-duty equipment. The company is currently investigating twoprojects for expansion. It can only undertake one of them and hasasked your advice in deciding which one to proceed with. ProjectBella: Production at the existing factory could be expanded. Thecost of the new plant for this option would be an initial outlay of$121 000 000. This would result in an additional $12 200 000 profitbeing earned in each of the 6 years that the project would last.The new plant to be fully depreciated over the 6 years, on astraight-line basis, in accordance with the company's accountingpolicy. The financial team has also determined that the new plantmust bear its share of the existing overheads and that amounted to$320 000 per annum. These expenses were also included in the profitcalculation. Consultant fees cost $10 000. Project Bow: Productioncould be increased by purchasing a new manufacturing facility inSouth Africa. The cost of the facility would be an initial outlayof R320 000 000. Annual sales for the 6-year period are expected tobe R92 000 000, and fixed and variable cost of R13 million and R3million respectively. Depreciation is calculated using thestraight-line method. Consultants’ fees are expected to be R1 250000. Additional information: * The South African inflation isexpected to exceed the American inflation by 2% throughout the lifeof the project. * Sherwood Limited’s cost of capital is currently9%. * The current spot exchange rate is R16.44/$. Advise SherwoodLimited which project they should undertake, showing yourcalculations and assumptions to support your advice 4.1 (22 marks)4.2 Advise Sherwood Limited if it is worth investing in neither, inone or in both of these projects (3 marks)