Question 1 [30 Marks]

The day you started studying at Monash University Malaysia, you fell in love with The Mad Alchemy (the coffee shop next to the library). After a while, you started thinking about how nice it would be if you owned it. Being a coffee lover, you apply for a job at The Mad Alchemy (TMA), and you get it. After working for some time, you realize that you like your job very much and that the shop is doing pretty well. Your desire to own this shop grows even more. As an employee, somehow, you get close to the owner, Mr. Reza, and find out that he is a bit tired of running TMA and that he wants to sell the business. You tell him that you are interested, but currently, you don't have enough funds to buy it from him. Instead, you propose to him that you would like to buy it from him in five years once you save enough funds. Mr. Reza generally agrees to your proposal, but with one condition. He wants you to continue working and run TMA for him so that he can take some time off, and in return, he promises to continue paying you the same monthly salary before every month and give you 20% of the annual profit after tax that TMA makes at the end of each year. As you agree to this deal in general, you find out that the business has been making RM150,000 of profit after tax for the last five years. Both of you agree that the shop will continue to earn the same amount indefinitely. Mr. Reza thinks that TMA is worth RM1 million but is willing to sell it to you for RM850,000 in five years if you accept his offer to work and run the business for him. You tell him that you appreciate his offer and that you need to consult your parents and friends and evaluate your finances to see whether you will have enough money or not to purchase the shop from him.

1. If the discount rate to evaluate such businesses is 16.5%, would you buy TMA for RM850,000 if you had the money? Why or why not?

[3 marks]

2. After talking to your parents and evaluating your finances, this is what you find out:
   1. Your parents are willing to support you immediately with RM300,000, which you can deposit in your savings bank account and earn an annual interest rate of 5.5%. additionally, the 20% of the TMA's profit you would receive over the next five years, if you accept Mr. Reza's offer, can also be deposited in the savings account and earn the same return.
   2. You can save RM2,500 from your salary every month and invest it in a mutual fund that pays an annual return of 13% compounded monthly. You are aware that this is riskier than bank deposits, but you are willing to accept this higher risk for higher returns. To maximize your returns, you invest RM2,500 in a mutual fund as soon as you receive your salary.

If you accept Mr. Reza's offer and proceed with the above investment options, would you have enough to buy TMA for RM850,000 in five years?

[13 marks]

3. If you somehow manage to collect enough funds and buy TMA for RM850,000, you have two options going forward. First, you can continue running the business as it is and earn RM150,000 per year. The second option you have is to invest an additional RM100,000 once you buy the shop to introduce some new products and services, which would make your annual profit after tax grow by 2.50% every year. Either way, your decision is to sell the business after ten years. If you do not invest anything in it, the business can be sold for RM400,000 after ten years. If you do invest the RM100,000, you can sell the business for RM500,000 after ten years. The discount rate to evaluate this business is 16.5%
   1. If you use the net present value method to assess these two options, which option is better? Would you accept both options? Why or why not?

[7 marks]

2. If you use the payback period method, which option is preferable? Why?

[4 marks]

3. Given your investment horizon here, which of the two valuation methods above (payback period or net present value) do you think is more appropriate for assessing these two investment options? Why?

[3 marks]