Question

Project B

Involve setting up an independent manufacturing facility in Taiwan. The cost of the facility would be an initial outlay 2 800 000 Taiwan dollars. This would result in:


annual profit 500 000 Taiwan dollars, for the 5 years of the project.


The annual fixed costs variable costs are 90 000 and 80 000 Taiwan dollars respectively. These costs were not included in the profit calculation calculation.


Consultant fees of R40 000 Taiwan dollars were included in the calculation of profit for Project B


Note:


Batman Traders Limited current costs of capital is 11 percent


The Taiwanese inflation is expected to exceed the South African inflation by 2 percent p. A throughout the life of the project.


The cuurent spot rate exchange is 2. 5 Taiwan dollars to the Rand.


Required.


Compute the neccesary calculations and advise Batman Traders Limited it is worth investing in either, in one of both of these two opportunities.

Answer 1

Okay, let's go through this step-by-step:

Given information:

- Initial investment for Project B: 2,800,000 Taiwan dollars

- Annual profit for 5 years: 500,000 Taiwan dollars

- Annual fixed costs: 90,000 Taiwan dollars

- Annual variable costs: 80,000 Taiwan dollars

- Consultant fees of 40,000 Taiwan dollars included in profit calculation

- Batman Traders' cost of capital: 11%

- Expected inflation differential: Taiwan 2% higher than South Africa

- Current exchange rate: 2.5 Taiwan dollars = 1 Rand

Calculations:

1. Convert initial investment to Rand:

- 2,800,000 Taiwan dollars / 2.5 = 1,120,000 Rand

2. Calculate annual net cash flow:

- Revenue: 500,000 Taiwan dollars

- Less: Fixed costs (90,000)

Variable costs (80,000)

- Net profit before consultant fees: 330,000 Taiwan dollars

- Less: Consultant fees (40,000)

- Net profit after consultant fees: 290,000 Taiwan dollars

- Convert to Rand: 290,000 / 2.5 = 116,000 Rand

3. Calculate net present value (NPV) over 5 years at 11% discount rate:

- Year 1: 116,000 / 1.11^1 = 104,505

- Year 2: 116,000 / 1.11^2 = 94,095

- Year 3: 116,000 / 1.11^3 = 84,868

- Year 4: 116,000 / 1.11^4 = 76,444

- Year 5: 116,000 / 1.11^5 = 68,801

- Total NPV = 104,505 + 94,095 + 84,868 + 76,444 + 68,801 = 428,713

4. Account for inflation differential of 2%:

- Increase annual net cash flows by 2% each year

- Recalculate NPV:

- Year 1: 104,505

- Year 2: 96,177

- Year 3: 86,525

- Year 4: 77,973

- Year 5: 70,157

- Total NPV = 435,337

In summary, the NPV of Project B is 435,337 Rand after accounting for inflation and exchange rates. I would recommend accepting this project since the NPV is positive. Let me know if you need any clarification or have additional questions!