Introduction

Put yourself in the following situation as a member of the Financial Services Team of ABC plc, which is an Oman conglomerate. It owns companies across different industries, such as car manufacturing, consumer goods, leisure etc. You have been requested to provide meaningful financial analysis and information for decision making concerning, capital investment, constrain in production, budgeting, and sensitivity analysis. Accordingly, you are required to write a report (1,600 words in total) providing information about these areas.

Investment Opportunities

Because of the climate change target of the Oman (the road to net-zero target), the companys newly appointed investment manager Mr. Khalid Ahmed came up with a new investment strategy closing five of the companys existing brand and focusing more on the companys most popular electronic vehicle brand in Oman. According to his assessment, this closing decision will generate around OMR 100 million free cash flow, which the company could reinvest to expand its popular brand. Elected. Mr. Khalid suggests that the market survey indicates this is one of the most popular brands in Oman, and demand is increasing. The year-to-year sales of the Electec brand have gone up by 25% (5,000 units in 2021 compared to 2020), which was higher than all of those five brands together. Moreover, he has indicated that the expansion decision will reduce the overall cost while improving quality. This cost-quality dynamic will help the company face competition and achieve a larger market share. However, this expansion will cost OMR 150 million for the company, which require rigorous strategic assessment, including financial viability. Now, she has approached you to evaluate this possible restructuring decision, whether it is a financially viable strategy or not. She also has suggested that this expansion project will run for the next five years, and after that, the company will enter into a new strategic cycle. You have collected the following information from her to do the financial analysis for 2 meaningful decisions. The expansion is expected to increase the sales of Electec by the following units.

8,000 units in 2022

8,000 units in 2023

10,000 units in 2024

11,000 units in 2025

12,000 units in 2026

In 2021 the market price of this brand was OMR 45,000, but the company wants to reduce it by OMR 5,000 in 2022 and then will increase/decrease with the pace of the economy and purchasing power of the consumers. The Bank of Oman bank rate will remain 0.50 per cent for the next couple of years in line with this economic assessment, your company has decided not to increase the price for the next three years (i.e., till 2024), but from the fourth year, a contingency plan is in place to increase the unit price by OMR 2,000. The production cost is OMR 20,000 per unit, which will increase in the line of inflation and other materials cost over the projects life at a rate of 10% each year starting from year two. The production involves fixed overhead expenditure of OMR 20 million in 2022 and 2023, OMR 15 million in 2024 and OMR 10 million in 2025 and 2026. The project requires a working capital investment of OMR 850,000 at the beginning, 50 per cent of which the company will recover at the end of project life. The cost of promotion and R&D will be OMR 5 million, respectively, over the five years. Assume that there is no other cost involved in this investment. The company is currently following the straight-line depreciation method, and historically 10% of the cost price of such investment is recovered in the final year.

Cost of capital is assumed to be 12%

Assuming corporation tax in OMAN is 10%

Requirement

a) Evaluate the total value addition (i.e. total NPV) and breakeven rate (i.e. IRR) of this possible restructuring decision.

b) Advise management on what to do about the above project. Your advice should be based on the analysis in (a)

c) Analyse the sensitivity of the projected NPV to the unit sales and the cost of capital.