Groove Hotel Berhad Currently operates a chain of hotels in Ipoh, Perak. During this pandemic, the company finds it hard to maintain sales and manage expenses. Below is a summary of the companys financial statements for the year 2019 and 2020.

The properties owned by the company are in Meru, Ipoh Garden and Station 18. The hotel located in Station 18 is not generating any income as it is located quite far from the main town and frequently classified as a red zone due to the number of Covid-19 cases. The management team are very worried as the impacts of the pandemic are expected to continue effecting the tourism industry until the year 2022. It is understood that drastic measures must be taken to ensure that the company can survive. After evaluating all options, the management is considering to join the food and beverage industry. While some senior managers are against the proposal, a team of young and creative managers had already made a list on how execute the idea. Below is the information that they have collected:

Below is the information that they have collected:

This will be a 10-year project.

Revenues from the restaurants are expected to be RM150,000 in the first year and increase by RM50,000 in the next year. Once the tourism industry is fully opened, the sales of sales are expected to be RM300,000 per year for the remaining years.

A new time management system costing RM5,000 will be implemented. This will result in the cost of sale for hotels operation will be as per the rate of year 2019. The cost of sales of the restaurants are expected to be 30% of sales.

RM20,000 Immediate investment in inventories is required when the restaurant opens.

The building in Station 18 can be sold at a value of RM1,200,000. The book value of the building is RM1,450,000.

The other two buildings will remain as hotels and will operate as usual. However, the first floor of both buildings will be renovated to transform them into restaurants.

The buildings are not depreciated as the company is using fair value model.

The two remaining hotels are expected to fully operational at the beginning of year 2023. This will increase hotel revenue to RM700,000.

The renovations costs of the building are expected to be RM2,000,000 excluding cooking equipment.

Advertising expenses will be RM50,000 in the first and RM40,000 in the second year. The company is expected to incur RM30,000 advertising expenses for the remaining years.

The staff working in the hotel in station 18 will work at the restaurants as cashiers and cleaners. However, an employee (salary of RM2,000 per month) can be terminated.

Any layoffs will require the company to compensate the employee RM20,000 each.

To operate the restaurants, the company will need to train their staff at a cost of RM3,000.

The minimum salary of an experienced head chef is RM8,000 per month.

It is best to differentiate the menus for the restaurants to give more options to customers. The restaurants must also be able to provide dine-in and room services when the hotels are reopened.

The contract with a nearby restaurant that is providing meal packages to the guest can be terminated. This will save the company RM50,000 per year. However, a penalty amounting RM20,000 must be paid due to breach of contract.

The companys required rate of return is 12%

Tax rate is 25%

It is also important to note that if the company chooses to do nothing and wait until the year 2023 for everything is expected to return to normal, the company will suffer losses (similar to year 2020) for year 2021 and 2022. In year 2023, it is expected that the company will be able to gain 50% of the profit earned in the 2019. Profits will return to normal in year 2024.

Question 1 (A)

List the cost of cooking equipment needed to start the restaurants. [10marks]

Question 1 (B)

Use Capital budgeting techniques (non-discounted payback period, NPV and IRR) to evaluate the project. [30marks]

Groove Hotel Berhad Statement of profit or loss for the year ended 31 December ... 2019 2020 Sales 1,200,000 350,000 Cost of sales (420,000) (217,000) Gross profit 780,000 133,000 Admin cost (120,000) (120,000) Distribution cost (35,000) (50,000) Other income 24,000 24,000 Operating profit 649,000 (13,000) Investment income 18,000 10,000 Finance cost (60,000) (60,000) Net profit 607,000 (63,000) Tax (151,750) Net profit after tax 455,250 (63,000) 2020 3,500,000 300,000 Groove Hotel Berhad Statement of financial position as at 31 December ... 2019 NON-CURRENT ASSETS Property, plant and equipment 3,500,000 Investments 300,000 CURRENT ASSETS Prepayments 12,000 Inventories 5,000 Account receivables 13,000 Cash 1,200,000 5,030,000 5,000 2,000 2,000 840,000 4,649,000 1,000,000 993,000 1,000,000 930,000 EQUITIES Share capital Reserves NON-CURRENT LIABILITIES Bank loan 5% Bonds CURRENT LIABILITIES Account payables Accruals 2,000,000 1,000,000 1,700,000 1,000,000 32,000 5,000 5,030,000 15,000 4,000 4,649,000 Groove Hotel Berhad Statement of profit or loss for the year ended 31 December ... 2019 2020 Sales 1,200,000 350,000 Cost of sales (420,000) (217,000) Gross profit 780,000 133,000 Admin cost (120,000) (120,000) Distribution cost (35,000) (50,000) Other income 24,000 24,000 Operating profit 649,000 (13,000) Investment income 18,000 10,000 Finance cost (60,000) (60,000) Net profit 607,000 (63,000) Tax (151,750) Net profit after tax 455,250 (63,000) 2020 3,500,000 300,000 Groove Hotel Berhad Statement of financial position as at 31 December ... 2019 NON-CURRENT ASSETS Property, plant and equipment 3,500,000 Investments 300,000 CURRENT ASSETS Prepayments 12,000 Inventories 5,000 Account receivables 13,000 Cash 1,200,000 5,030,000 5,000 2,000 2,000 840,000 4,649,000 1,000,000 993,000 1,000,000 930,000 EQUITIES Share capital Reserves NON-CURRENT LIABILITIES Bank loan 5% Bonds CURRENT LIABILITIES Account payables Accruals 2,000,000 1,000,000 1,700,000 1,000,000 32,000 5,000 5,030,000 15,000 4,000 4,649,000