The Zooline Company (Pty) Ltd is an American based company that focuses on the LSM 8 -10 markets. They do vehicle interiors, raise or lower suspensions and install top end sound systems and monitors in luxury vehicles. The company is considering expanding its operations, and it has the opportunity to acquire a Mauritian based company, LUI , or set up a new division in American in another state.
Money symbols: $ = Dollars and MUR = Mauritian Rupee
The relevant details for these two options are:
Acquisition (LUI, Mauritius) MUR
Redundancy costs 22 000 000
Cost of license (annual Cost) 900 000
Annual sales 18 000 000
Consultants fees (per annum) 4 500 000
Annual variable costs 12 000 000
Annual fixed costs 1 500 000
Set-up division (American State) $
Cost of land and buildings 16 000 000
Cost of machinery 13 800 000
Annual sales 15 000 000
Annual variable costs 7 600 000
Annual fixed costs 3 800 000
Share of existing head office expenses 1 400 000
Additional information:
-Zooline's current cost of capital is 10%
-The project is expected to have a life-span of 10 years
-The Mauritian cost of capital is expected to be 2 percentage points higher than in America throughout the life of these investments
-The current spot exchange rate is 1 $ = 3.6 MR.
- Ignore all taxes.
Required:
Make the necessary calculations for the two options and advise Zooline Company on which is the more lucrative of the projects purely from an investment point view. (Show all workings)