[SOLVED] NuLife Limited is an investment holding company

NuLife Limited is an investment holding company which operates through a number of subsidiaries and employs over 20,000 people. NuLife operates private hospital, primary healthcare, emergency medical services and renal care networks in South Africa. In addition to its hospital services, the company offers primary healthcare, sub-acute care, day surgery, occupational health and employee wellness services. The companyâ€™s ordinary shares have been listed on the Johannesburg Stock Exchange South Africa for a number of years and the company has grown substantially since it listed. General Information: NuLife Ltd Market & competitors Net lifecare Ltd has in the recent years developed as a serious competitor in the private healthcare sector. The directors of NuLife Ltd are concerned with this development and the managing director, Dr Bonakela Matewane, stated the following in the recent annual report: 'The role of management in marketing services is critical to the success and the shape of real-world life cycles. Also, of central importance is the high relative market share as the key to competitive success.' Economic outlook The recent coronavirus (COVID-19) pandemic has not reduced earnings significantly yet, but it is expected that the decrease in the 2020 earnings will result in cash flow constraints in the next year and this may temporarily hamper expansion projects. Major expansion projects which were considered before the pandemic have been reconsidered and will only be evaluated again in a year or two. However, the medium-term view of the economy and the industry is very positive and the present cash flow may allow for some smaller capital projects to take place. Corporate & social responsibility NuLife Ltd is strongly committed to the development of South Africa and its people. Considerable emphasis is placed on giving back to the nation by committing substantial resources to community and nation-building initiatives. Being a healthcare company, the bulk of its CSR activities are in the healthcare arena. Preference is given to initiatives that provide health services to local patients, health science education, at undergraduate as well as postgraduate level, support to faculties of health sciences, community projects, wellness programmes and sport development. Expanding and Upgrading: NuLife Ltd Hospital Port Elizabeth The directors of NuLife Ltd are considering upgrading and expanding the existing healthcare facility in Port Elizabeth, Eastern Cape, namely NuLife Ltd Hospital Port Elizabeth, by the addition of a new wing with a state of the art maternity unit and a new ICU facility. The cost of upgrading the healthcare facility is estimated to be R320 million at the start of 2021. Capital expenditure will qualify for a capital allowance for tax purposes of 20 per cent per annum on a straight line basis. It should be assumed that there is no resale value at the end of the project. An additional investment of R40 million to finance working capital will be required at the start of the project and is expected to flow back at the end of the project. This amount will have to be increased on an annual basis to account for the effects of inflation. The project is evaluated over a period of six years, starting in January 2021. Project net operating profits in real terms (January 2021 values) in South African Rands (ZAR) are estimated as follows:

Additional fixed costs exclude depreciation. All cash flows should be assumed to arise on 31 December of each year. It should also be assumed that taxation is paid on the last day of the year in which the tax liability arises. The cost of upgrading the healthcare facility has not been determined yet, as the board was still awaiting the report from an external consultant. Possible Expansion of Operations into Botswana Atthe last board meeting, the operations director added a new point to the agenda â€“Expansion of private healthcare facilities to Botswana by building a private hospital in Gaborone. The operations director, Dr Sipokazi Potgieter, then asked the board permission to investigate the possibility of expanding private healthcare facilitiesto Botswana, a neighboring country which is also located in Southern Africa, instead of upgrading the existing healthcare facilities in Port Elizabeth. In her discussion of the issue, the operations director concluded that the company needed to expand their operations to new potential markets in other countries in order to maintain growth in operations. She mentioned that the market for private healthcare was virtually unexplored in Botswana and that there was a substantial growing upper middle class in this country, which, according to market research, would utilize private healthcare facilities if they were available. The marketing director added that this is an opportunity to expand into Africa where lack of sufficient government healthcare facilities, together with growing economies, have created the need for private healthcare. The board briefly discussed the matter and then asked the marketing and operating directors to investigate the matter further and to report back at the next board meeting. The two directors have identified a site in Gaborone that could be suitable for a building meeting NuLife Ltdâ€™s operational requirements at a relatively low cost. The projectâ€™s net operating cash flows after tax in Botswana Pula, BWP, the local currency of Botswana, were estimated to be as follows (in nominal terms):

The financial director mentioned that it was difficult to compare the expansion of the existing healthcare facility in Port Elizabeth to the building of the new private healthcare facility in Gaborone, Botswana, as cash flows were not in the same currency. He also mentioned that the inflation rate in Botswana, 14 per cent, was considerably higher than the 10 per cent inflation rate in South Africa. The tax rate for companies in South Africa as well as Botswana is 28 per cent. Due to the double tax agreement with Botswana, profits will not be taxed in both countries. The current exchange rate between the Botswana Pula (BWP) and the rand are expected to be as follows (1 January 2021): 1 Rand: 0,70 BWP The inflation rate in South Africa is approximately 10 per cent per annum and is expected to remain at this level for the foreseeable future. The cost of capital for NuLife Ltd is 12 per cent pa. Financing In order to remain within their target capital structure, either of the projects would be funded by a combination of debt and equity financing. Regardless of which project is decided upon, the decision has been made that the project should be financed by means of available cash resources as well as by a long-term loan. Should the project in Botswana be accepted by the directors, the possibility of a loan from the Bank of Botswana will be investigated. Press Statement In September 2020, the directors issued a press statement announcing that their intention to temporarily freeze dividend pay-out levels at the current level during the development stage of the proposed capital investment period, due to cash flow constraints. Required 1. Calculate the NPV of the two alternative investment projects. All cash flows should be shown in ZAR (R). 2. Briefly describe the two methods commonly used for evaluating international investments and discuss why they would render more or less the same net present value in the local currency. 3. Calculate the profitability index of the two projects based on your answer in (1) above and make a recommendation to the directors in respect of which project should be accepted. 4. Discuss the major risk issues that should be considered by NuLife Ltd when evaluating the project in Botswana. 5. Discuss the merit of obtaining a loan from the bank of Botswana if the directors decide to build the hospital in Botswana. 6. Advise on how the press announcement may influence the share price and how investors may perceive the temporary proposed reduction in dividends.

Question: NuLife Limited is an investment holding company