Muscat Poly Products SAOG

Muscat Poly Products SAOG, a fast growing company with an excellent marketing and distribution network in Oman (& GCC), is planning to expand its operations by selling its Poly Product Mattresses in South East Asia.

The current price of its fastest selling mattress Raha is 55 Rials and it plans to sell the product initially in Malaysia and other south east Asian countries. Expected sales in Malaysia & other SE countries in the first seven years are as follows: 7000 units in the first year, increasing by 20% each year in year two and three, and 10% each year in year 4 and 5, and 5% each year in year 6 and 7.

The company is considering two alternate production plans:

Production Plan 1: Establish a new factory in Malaysia at an estimate cost of 12 million MYR (Malaysian Ringgit). The capacity of the plant would be sufficient to meet the demand for Poly Products in the next seven years. The sale price per mattress would be 650 MYR and EBIT as % of Sales is expected to be 35%.

Muscat Poly Products expects that at the end of seven years it can sell the factory at 50% of its current estimated cost.

Production Plan 2: Establish a new factory in Oman to meet the Malaysian demand at an estimated cost of 1.2 million Rials. The export price per mattress would be 55 Rials per mattress and transport cost from Oman to Malaysia would be 2 Rial per mattress. EBIT as % of sales is expected to be 42%. Muscat Poly Products expects that at the end of seven years it can sell the factory at 35% of its current estimated cost.

Financing:

For the purpose of financing the new factory, Muscat Poly Products has two choices:

1. Omani Rial loan at a fixed rate of 7% per annum

2. Loan from Euro Credit market in Pound Sterling (GBP) on floating rate basis at LIBOR plus 4%. Current LIBOR interest rate is 1%.

(Assume that interest is paid on an annual basis and LIBOR interest rates can vary from one year to the next between 1% to 5%. They can go up or down from one year to the next.

Get the current exchange rate between Omani Rial and Malaysian Ringgit from yahoo finance

Get the current exchange rate between Omani Rial and Pound Sterling from yahoo finance

The finance manager of Muscat Poly Products is also worried that the Malaysian Ringgit can vary in the range of plus 25% to minus 25% in the coming seven years.

Similarly pound exchange rate can vary in the range of plus 25% to minus 25% in the coming seven years

Assume no taxes and no inflation.

Assume that depreciation takes care of repayment of principal, and therefore you need to be concerned only about annual interest expenses.

Ignore administrative and marketing expenses.

Required:

What are the alternate scenarios in front of the companys management (Suggest at least four scenarios). Calculate the annual profits (in OMR) (for each of the seven years) of the new proposal under each scenario.

If exchange rates or interest rates are going against the company in any of the above scenarios, suggest products which will help the company to protect itself. Calculate annual profits (in OMR) taking into account the costs and benefits of hedging.

Based on your calculations should Muscat Poly products go ahead with its expansion plan ?

Which proposal do you recommend: Production Plan 1 or Production Plan 2

At the end of the report write a summary page showing annual profits from each scenario in the form of a table, and your conclusions and recommendations