Reference no: EM132512790

Point 1: The company engaged an international consultancy firm at a cost of R800 000. Research by the consultancy firm suggested that the export route was less risky, especially considering the company's plans to try out the international market for an initial five-year period before making a longer-term decision.

Point 2: In order to export the furniture, the company will need to ramp up production in South Africa. This will need the company to expand its production capacity through building a new factory and acquiring new machinery. Construction of the factory will cost the company R18 million while the new machinery will cost the company R6.5 million to purchase and R500 000 to transport and install. The company expects additional after-tax operating cash flows from the new markets to be R6 million per annum, stated in current prices. The cash flows are expected to increase in line with inflation. The expected annual inflation rate is 6%. The factory and machinery are expected to have after-tax salvage values of R10 million and R1 million, respectively (stated in current prices). The company's nominal cost of capital is 12%

Question 1.1 Calculate the net present value (NPV) and internal rate of return (IRR) of the expansion project.

Question 1.2 Given your answers in 1.1 above, should Mukwa Furniture Limited proceed with the expansion?

Question 1.3 Briefly discuss the types of exchange rate risk that Mukwa Furniture Limited will be exposed to by venturing into international trade.