Put yourself in the following situation as a member of the ACME, which is an USA 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

1. ELE is the Investment Manager of LLM and has requested some analysis concerning a proposed 5-years investment. The company plans to open a showroom in Muscat and have narrowed their selection down to two locations: (1) City Centre and (2) Seaside. You have to evaluate these options based on the following information. LLM will lease the showroom initially for 5 years, and the total initial cost of investment is estimated to be $ 10 million each.

Option one: City Centre

It is expected that the City Centre showroom will increase the overall sales revenue by 10% per annum and the variable cost will be forty-two percent of sales revenue. The fixed overhead cost will be $ 3,500,000, $ 2,000,000 and $ 1,500,000 in the first, second, and third years. The promotion cost will be $ 500,000 in the first two years and $ 200,000 for the next three years. All other expenses will be 10% of the total contribution margin. In the second year, the company will need a working capital investment of $ 2 million, and 60% of which will recover at the end of project life. The company follows a straight-line depreciation method and expects to sell the assets at 20 % of historical cost in year 5.

Option two: Seaside

On the other hand, if the showroom is opened at Seaside, then it will require fixed overhead cost for four years $ 2,500,000 in year one, $ 1,800,000 in year three, $ 2,100,000 in year four and $ 1,100,000 in year five. All other costs will increase and be at 10% per year of the contribution margin. The working capital investment will be $ 1,500,000 in year three, and 55% of it will recover in the last year. The sales revenue will increase at 12% per annum, and variable cost will be 45% of sales. The company will follow a similar strategy for depreciation and promotional cost, just like the city centre.

Assume Corporate Tax in USA is 10%

The cost of capital is assumed to be 12%

Requirement

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

Also, Advise management on what to do about the above project. Your advice should be based on the analysis in Finally, Analyse the sensitivity of the projected NPV to the unit sales and the cost of capital.

Following profit statement is provided for your reference to calculate the net cash benefit by your investment manager Ms Banda]

PROFIT STATEMENTS
($ million)
Years	2018	2019	2020	2021	2022
	$	$	$	$	$
Sales revenue	176.200	190.000	199.110	201.240	201.545
Cost of Sales	28.629	31.294	32.111	32.919	32.382
Gross profit	147.571	158.706	166.999	168.321	169.163
Fixed and semi-variable costs
Fixed overhead	34.283	40.872	42.478	44.014	45.523
Promotion	5.000	6.000	7.000	8.000	9.000
Research and Development	6.000	6.500	7.000	7.500	8.000
Depreciation	31.500	49.400	51.350	53.300	55.250
New model launch	20.000		0.000	0.000	0.000
Professional charges	8.000	8.000	8.000	8.000	8.000
Stock upkeep	0.000	0.362	0.376	0.472	0.504
Total fixed and semi variable	104.783	111.134	116.203	121.286	126.277
Operating profit	42.788	47.572	50.795	47.036	42.887
Interest on loans	15.000	25.000	30.000	30.000	15.000
Profit before tax	27.788	22.572	20.795	17.036	27.887
Tax	9.726	7.900	7.278	5.962	9.760
Profit after tax	18.062	14.672	13.517	11.073	18.126
Dividends	10.000	10.000	10.000	10.000	10.000
Retained earnings	8.062	4.672	3.517	1.073	8.126