Question

Roll-on (Ltd), South Africa , is a specialist manufacturer of ‘roller door’. In seeking to expand its operations, it has the opportunity to acquire an American subsidiary company, Door Dynamics or set up a new division in South Africa. The relevant figures for these two options are as follows:

Set up new division at home (RSA)      
Costs Rands(millions)
Cost of premises 30. 400
Machinery 22. 000
Annual Sales 16. 000
Annual variable cost 5. 000
Additional head office expense 1. 000
Existing head office expenses 0. 500
Depreciation: machinery (10%) 2 .200

Acquisition (Door Dynamics)
Costs Rands(millions)
Acquire shares from existing shareholders
10. 000
Redundancy cost 2. 500
Annual Sales 18.000
Annual variable cost 9.500
Annual fixed cost 5.500
Consultation fees 5.800
Additional information:
• Project life is 10 years
• Roll-on (Ltd) current cost of capital is 12%
• Inflation in the USA is expected to be below the South African inflation by 3% per year, throughout the life of the project.(Hint: use 9% as discount rate)
• Assume the current rate of R16 to 1 USD.

Answer 1

NPV Calculation of New Division at Home

The NPV of the new division at home is RSA 4,102 million

Note: No information regarding whether the additional head office expense being either annual or one time was given. So it was assumed to be annual. Existing head office expenses are not relevant since they will be incurred regardless of whether the investment is undertaken.

NPV Calulation of Acquisition of Door Dynamics

The NPV is RSA 953 million

Note: No information regarding whether the consultation fee being either annual or one time was given. So it was assumed to be a one time expense. (Consultation fees usually not incurred annually)