Determine the rand net present value of the project

Assignment Help Financial Accounting
Reference no: EM132508802

Point 1: Bavarian Motor Works (BMW) is a Germany registered plc that has a plant situated in Port Elizabeth, South Africa. The plant manufactures expensive, built to order, right hand drive (BMW) luxury cars for the African commonwealth market. The plant has been in operation for over 40 years. The company has seen an unprecedented year on year growth in revenues and profits over the past 25 years. This growth has been attributed largely to South African companies being exposed to international markets since the advent of democracy in 1994. The quality of South African products has taken international markets by storm. All the right hand drive BMW cars for the African commonwealth markets are manufactured by the plant in Port Elizabeth.

Point 2: The BMW plant in Port Elizabeth has been supplying all other commonwealth African Markets with expensive, built to order, right hand drive luxury BMW cars except for the Botswana market. Currently, the Batswana customers have been ordering directly from South Africa. The management of the South African division of BMW is considering extending the distribution network into Botswana.

The financial manager has carried out a detailed assessment of costs and revenues of opening a distribution network in Botswana. These are given below as follows:

Initial outlay needed: 9 million Botswana Pulas

The expected cash inflows in Botswana Pulas, net of tax are given below:

 Year                                        1            2       3               4

Cash Flow (millions of Pulas) 3.5        5.9     5.0          7.0

The following information has also been made available:

  1. Expected inflation rate in Botswana 3% per year
  2. Due to the fact that South Africa and Botswana are in the same customs union, the real interest rates are expected to be the same.
  3. Assume the current spot rate is: Botswana Pula 1.3 per 1 ZAR
  4. The treasury bonds in Botswana carry an interest rate of 4 percent per annum and in South Africa they carry 5 percent per annum.
  5. The company's current WACC is 14 percent. This is used to evaluate all investment decisions.
  6. The company's current capital structure is composed of R20 million in shareholder's funds and R4 million long term debt. The debt is redeemable in 2 years' time
  • According to the presentation made by the financial manager to the board of directors part of the investment can be financed from the cash flow, but since it is also expanding operations in South Africa, the Chief Executive officer prefers external finance if it can be found on favourable terms. The financial manager has noted that the borrowing rates Euro-debt market is favourable. At 3% the rates are below those in both South Africa and Botswana.

Required:

Question a) Determine the Rand net present value of the project using the following methods:

I. By discounting annual cash flows in Rands

II. By discounting annual cash flows in Pulas

Question b) Discuss the following:

1. Discuss both in general terms and as it applies to [BMW] the use of WACC as a discount rate in international operations

2. The risks faced by BMW when it moves into an international market and how it might manage these risks

3. The methods of financing international operations and the factors that the company needs to consider before deciding to borrowing in Euro debt

Reference no: EM132508802

Questions Cloud

Explain why organizational structures differ : Explain why organizational structures differ. Define and provide an example of the four reasons why structures differ,
Prepare a bank reconciliation statement as at december : Prepare a bank reconciliation statement as at 31 December 2018. On 31 December 2018, the bank column of the C. Tech's cash book showed a debit balance
Calculate the ph at the volumes : We titrate a 100 mL weak base of 0.100 M using 0.200 M HCl.
What is the direct materials price variance : Myers Corporation has the following data related to direct materials costs for November: What is the direct materials price variance
Determine the rand net present value of the project : Determine the Rand net present value of the project using the By discounting annual cash flows in Rands and By discounting annual cash flows in Pulas methods
Explains five international marketing philosophies : The unit lesson explains five international marketing philosophies. Which orientation mostly applies to Maytag's washers and dryers? Explain why.
Why do you think standard deviation : Why do you think standard deviation may be a reliable predictor of risk? Give pros and cons of using standard deviation as a predictor of company's risk?
Determine the direct labor budget for this year : Sleep Tight, Inc. manufactures bedding sets. The budgeted production is for 23,100 comforters this year. Determine the direct labor budget for this year
What is a covalent network : 1. What is a crystal lattice, unit cell, and lattice points and why are they used?

Reviews

Write a Review

Financial Accounting Questions & Answers

  Financial statement analysis and preparation

Financial Statement Analysis and Preparation

  Shareholder of a company

Describe the ways that a person can become a shareholder of a company. Why Wal-Mart would split its stock?

  Financial and accounting principles

An understanding of financial and accounting principles can be a valuable tool for managers. While not all managers will find themselves calculating financial ratios or preparing annual financial data.

  Prepare a statement of cash flow using the direct method

Prepare a Statement of Cash Flow using the Direct Method and Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.

  Financial accounting assignment

This assignment has one case study and two question apart from case study. Questions related to document Liquidation question and Company financial statements question - Torquay Limited

  Prepare general journal entries for goela

Prepare general journal entries for Goela Ltd

  Principles of financial accounting

Prepare the journal entry to record the acquisition of the assets.

  Prepare general journal entries to record the transactions

Prepare general journal entries to record the transactions, assuming use of the periodic inventory system

  Global reporting initiative

Compare the view espoused by the economist Milton Friedman about the social responsibilities of business with the views express by Stigler.

  Explain the iasb conceptual frameworks

Explain the IASB Conceptual Framework's perspective of users and their decisions.

  Determine the company''s financial statements

T he focus of the report is to determine the extent to which you are comfortable relying on the financial statements as presented by management .

  Computation of free cash flow

Computation of Free Cash Flow

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd