ADVANCED FINANCIAL MANAGEMENT

ANSWER THE QUESTIONS.

Instructions:

• You need to find/calculate IRR by using trial & error method for the companies. You can refer any text book/website to find PVIFA, PVIF table, Cost of Capital/CAPM/WACC.
• Please state any assumption used for example risk- free rate, market return etc.

1. What are the theories, models and implementation in financial management and how the theories will help in practice?

2. Malaysian Airlines Bhd (MAS) is considering a proposal to buy two new passenger aircrafts in order to increase their service capacity. The aircrafts that are being considered are from model Airbus MH370. The price for each aircraft is RM279, 000,000. Generally, it takes two years for Airbus to construct each MH370 aircraft ordered.

The buying process requires MAS to pay down payment, which is 35% of the total aircraft price upon placing the order. The remaining 65% will be paid once the construction process has completed, before the delivery could take place. This is scheduled to be two years from the date where the order is placed. Below is the general information for one Airbus MH370 aircraft:

MAS Airlines Bhd. Accounting & Financial Department Aircraft Model Airbus MH370
COSTS	TOTAL AMOUNT	REMARKS
Maintenance cost	RM5,760,000 per year	All costs are projected to increase by 2% per annum throughout the projects life.
Salary: Pilot Air crews	RM240,000 per year RM240,000 per year
Fuel cost	RM16,000,000 per year
Insurance	RM9,600,000 per year
Aircrafts will be depreciated using simplified straight line depreciation method down to zero.
Each aircraft has 10 years economic life.

Each aircraft is expected to be able to increase MASs revenues by RM72, 900,000 during the first year of its operation. The revenue then is projected to increase by 4% per annum throughout the projects life. Since the aircrafts is the latest model in its class, the company will need to train their pilots and air crews on the aircrafts operational aspect. The training which will cost the company RM250, 000 will be conducted in Airbus Training Facility in France only if the aircrafts are purchased.

MAS will finance RM300, 000,000 from the total aircraft price through a loan from one of the local banks at 8.4% per annum. At the end of the projects life, each of the aircrafts is expected to be sold as used aircraft at prices tabulated as below:

Probabilities	Aircraft Price (RM)
0.20 0.30 0.35 0.15	218,000,240 219,000,420 218,240,240 219,840,460

Two months ago, MAS hired Wong Business Consulting Services Sdn. Bhd. to advise them on the proposal to buy the aircrafts. The consultation cost was RM44, 000 and had already being paid. If the two aircrafts are purchased, MAS will need to rent two hangars owned by Malaysia Airport Bhd. (MAB) for the purpose of aircraft maintenance and repairs. The rental costs for each hangar is RM200, 000 a year. The hangar rental costs will be revised every two years. Based on the discussions with MAB, the hangar rental costs are likely to increase by 2% every time the revision is made.

The corporate tax rate is 24% while the companys required rate of return is 14%.

1. Based on the information given,

1. calculate the projects total initial outlay.
2. calculate the annual project cash flows.
3. calculate the projects terminal cash flow.
4. how terminal value growth assumptions affect a projects overall value with the interactive tool: What is your cost of capital?