Reference no: EM132955257

Milo Limited, South Africa, is a specialist manufacturer of security doors and gates. In seeking to expand its operations, it could acquire a Dutch subsidiary company, Nabby Guard, or set up a new division in its home market. The relevant figures for these two options are:

Set up new division at home Rand

Cost of setting up premises 25 000 000
Cost of machinery 14 000 000
Annual sales 41 500 000
Annual variable cost 13 000 000
Head office expenses 5 000 000

The Head office expense includes existing  head office expense of R1 000 000

Depreciation: machinery 10% on cost annually 3 900 000

Acquisition Euro
Acquire shares from existing shareholders 13 000 000
Redundancy costs 7 000 000
Annual Sales 27 000 000
Annual variable costs 15 000 000
Annual fixed costs 5 000 000
Consultants fees 6 300 500

Additional information:

• The project is expected to last for 10 years.
• Milo Limited, current cost of capital is 13%.
• The Dutch inflation is expected to be below the South African inflation by 2% per year, throughout the life of this investment.
• The current exchange spot rate is R20 to the Euro (€).

Required:

Problem 1: Make all necessary calculations for the two options.

Problem 2: Advise Milo Limited on the viability of these two opportunities.