Akademi Sinar founded by Diya Karmila in 2010, provides personal and professional motivational courses, particularly for corporate employees. Karmila and her associates have developed several programs that have proved successful among the individuals completing the courses.

Currently, extensive thought and consideration are being committed to a new program to be used by small and medium entrepreneur as a client service. The course material, entitled the SME RINGGIT Plan, is addressed to the need and strategy for managing an individual’s personal resources. Jamal, the executive vice president of Akademi Sinar, has identified a strong potential market for such courses among entrepreneurs having little experience in the proper management of money. In visiting with the entrepreneurs, Jamal has received several commitments to purchase the course. However, he is reluctant to initiate the sales campaign before the completion of an investigation into the impact of several strategies upon the profitability of the firm. Specifically, questions still remain concerning the expected life of the instructional material and the marketing strategy.

In analyzing the prospects of the investment, Karmila and Jamal consider the basic product to have an expected life of approximately five years (plan A). However, this estimate could be significantly lengthened either through conducting an extensive marketing campaign in subsequent years (plan B) or by undertaking a major revision in the course package in the fifth year (plan C). The options under consideration may be summarized as follows:

Plan A:

The first strategy requires an investment at the present time totaling RM300 000. This amount would provide the necessary funds for production equipment (RM250,000) as well as working capital requirements of RM50,000. The working capital portion of the investment may be liquidated upon the termination of the course. The expected life of the project is five years.

Plan B:

The second alternative would permit an increase in the expected life of the course to 10 years. Based upon experience with prior investments of a similar type, the firm’s management considers the chances of extending a project’s life to be quite sensitive to increased efforts in the area of customer awareness in the latter years of the program. Thus, the extension of the product life would come from an intensive marketing campaign in years 6 through 10. The capital investment would be similar to the amount under plan A in that the same capital expenditure would be made (RM250,000); however, RM100,000 of working capital would have to be maintained, as opposed to only RM50,000 for plan A.

Plan C:

The final analysis to be performed relates to a two-phase investment in which the initial investment of RM350,000 is committed (including RM100,000 of working capital), but RM200,000 must also be expended on equipment at the conclusion of the fifth year.

This investment would result in substantive modifications and improvements in the program. While time is of the essence in going to the market, within the next few years several major improvements in educational equipment are expected. Such a two phase investment would allow the firm to reap the benefits of these developments.

To sum up, the management is considering two basic approaches for promoting SME RINGGIT Plan: (1) a concentrated effort whose intent is to saturate the market during a five-year period (plan A); (2) an extended investment in SME RINGGIT Plan, with the prolonged life being the result of a marketing campaign in years 6 through 10 (plan B) or a major revamping of the course structure in the fifth year (plan C).

The estimates of the annual receipts and operations expenses for the three plans are given in Exhibit 1.

EXHIBIT 1

Akademi Sinar

Estimated, Annual Receipts and Operational Expense

Sales

Year	Plan A	Plan B	Plan C
1	RM100,000	RM 75,000	RM 75,000
2	300,000	125,000	125,000
3	450,000	200,000	200,000
4	450,000	280,000	280,000
5	450,000	350,000	350,000
6	400,000	475,000
7	425,000	500,000
8	475,000	500,000
9	450,000	500,000
10	250,000	500,000

Marketing Expenses per Year

Year(s)	Plan A	Plan B	Plan C
1-5	RM35,000	RM25,000	RM25,000
6-7	50,000	25,000
8-9	70,000	25,000
10	25,000	25,000

These additional data are thought to bear on the decision:

1. The production of the material will require the use of a portion of an existing plant not included in the capital investment figures quoted in Exhibit 1. This part of the plant, which represents excess floor space, could be considered to have a book value of RM150,000 and a corresponding annual depreciation of RM10,000 per year. However, this segment of the plant could not be used oth­erwise owing to the floor plan of the building.

2. Cost of goods sold of similar programs has generally been a variable cost approximating 60 percent of sales.

3. Administrative expenses for the company will be RM10,000 annually, which has been the level of administration expenses for the past year. However, only RM4,000 of this amount will be allocated via the cost accounting system to the new plan.
4. The bank has agreed to finance RM 100,000 of the investment at an interest rate of 10 percent, with the interest being payable yearly, and the principal coming due at the end of the project life.
5. The company’s tax rate is 40 percent and it uses straight-line depreciation (no salvage value) for all expenditures.

A) Determine the costs of the three alternatives.

B) Compute the annual after-tax cash flows for the three plans.

C) Assuming a cost of capital of 10 percent for each plan, compute

i) the net present value (NPV),

ii) the profitability index,

iii) the internal rate of return (IRR)

D) Which course of action should be taken by the firm? Explain.