MCO 2.0: Essential businesses allowed with only 30pc management in the office, others to work from home

KUALA LUMPUR, Jan 11 The return of movement control order (MCO) in Malaysia from January 13 until January 26 will mean that only five economic sectors deemed essential are allowed to operate but with only 30 percent of management staff allowed at the workplace.

Prime Minister Tan Sri Muhyiddin Yassin today said the five essential economic sectors are factories and manufacturing, construction, services, trading, and distribution, as well as plantations and commodities.

He said these sectors are allowed to operate as they support work to supply essential needs such as food, drink, and household goods and self-care goods, personal protective equipment (PPE), medical tools and medicine for healthcare workers, international trading activities, and to ensure the supply chain is not interrupted, as well as supporting clinical infrastructure and emergency work.

(Source: The Star, Monday, 11 Jan 2021 06:45 PM MYT, by IDA LIM)

The management of TopCan Berhad was looking at the news above, they feel relief as their business is allows to continue as they are one of the suppliers of Personal Protection Equipment (PPE) in Malaysia. Knowing that the demand for PPE remains high in the future, the management believes they should enlarge the production capacity to capture the domestic and international market. To increase production capacity, they need to invest in a brand-new machine with the latest production system.

The management believes that the sales for the company will grow at 10 percent every year for 5 years until the discovery of a vaccine for COVIC-19. The company will set-up two production lines that cost RM2 million each. The management forecasts the sales for the company to increase by RM3 million for the first year. The operating cost sold will be 50 percent of the sales growth. Depreciation adopted for this investment is based on the MACRS approach. (year 1: 20%, year 2: 30%, year 3: 30%, year 4 & 5 will be 10% for each year)

To boost up productivity, the management needs to modify and renovate the company's existing premises that cost RM 500,000. New wiring of RM100,000 is needed as higher voltage demand for the new machines. The new production lines would require increased investment in an inventory of RM1,050,000, an account receivable of RM550,000, and an account payable of RM1,300,000. Training is needed to operate the new machine, it will cost RM100,000 to send 50 technicians in which it is HRDF (Human Resources Development Funds) claimable.

At the end of the investment, the management will be able to sell all the production machines to its competitor for RM200,000. The corporate tax rate for the company is 25 percent and the cost of financing for this investment is 12 percent per annum.

1. Determine the initial cost Identify the initial capital needed for the setting up of two production lines. (3 marks)
2. Forecast the changes of net cash flow from year 1 to year 5. (11 marks)
3. Identify the terminal cash flow at the end of year 5 (2 marks)
4. Advise the management whether they should invest in the machines. Justify your answers. (4 marks)