Arrec International Company is a South African Company. The Company is considering establishing a manufacturing unit to produce TV sets in Tanzania which has been the main destination for its exports

Arrec International Company is a South African Company. The Company is considering establishing a manufacturing unit to produce TV sets in Tanzania which has been the main destination for its exports over the last five years. Setting up of the manufacturing plant will involve an immediate investment outlay SAR 10 million. The plant is expected to have a useful life of 5 years with no salvage value. For taxation purposes, the company has to follow the straight line method of depreciation. To support the investment in Tanzania, an additional working capital of TZS 100,000,000 is needed. Other relevant information on the project follows:

Land     TZS8,000,000

Production per annum   1,000 units

Variable cost per unit   TZS200,000 of which:

Raw Materials per unit  TZS50,000

Labor     TZS100,000

Overheads    TZS50,000

Other Fixed Costs per annum  TZS200,000,000

Selling Price per Unit   TZS700,000

The South African is subjected to 40% corporate tax rate in Tanzania and its cost of capital is 20 per cent. The exchange rate between the TZS and SAR has been very volatile due to unstable interest rate policies in the two countries. The current exchange rate between the TZS and the SAR is TZS50/SAR. Interest rates are expected to be as follows in the next five years:

YEAR     TANZANIA   SOUTH AFRICA

  1             5%     6%

  2             7%     6%

  3             6%     5%

  4             8%     6%

  5           10%     8%

South Africa imposes no taxes on cash profit remitted from abroad.