The lotus is a midsized plastic molding manufacturer located in Ijok, Selangor. The CEO is Encik Asfan, who inherited the company from his grandfather. Over the years, the company expanded its business and is now a reputable manufacturer of various plastics items. One of the major revenue-producing items manufactured by Setia Bersama Berhad is a Hospital Disposable Bin. Setia Bersama Berhad currently has one disposable bin model, and sales have been excellent. Setia Bersama Berhad spent RM750,000 to develop a prototype for a new hospital disposable bin that is lighter and more user friendly compared with the current model.

The company has spent a further RM200,000 for a marketing study to determine the expected sales figures for the new hospital disposable bin. Setia Bersama Berhad can manufacture the new hospital disposable bin for RM185 each in variable costs. Fixed costs for the operation are estimated to run RM5.3 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000, and 80,000 per year for the next five years, respectively. The unit price of the new hospital disposable bin will be RM480. The necessary equipment can be purchased for RM38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the disposal value of the equipment in five years will be RM5.4 million

As previously stated, Setia Bersama Berhad currently manufactures a hospital disposable bin. Production for the existing model is expected to be terminated in two years. If Setia Bersama Berhad does not introduce the new hospital disposable bin, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing hospital disposable bin is RM310 per unit, with variable costs of RM125 each and fixed costs of RM1.8 million per year.

If Setia Bersama Berhad does introduce the new hospital disposable bin, sales of the existing hospital disposable bin will fall by 15,000 units per year, and the price of the existing units will have to be lowered to RM275 each. Net working capital for the hospital disposable bin will be 20% of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in year 1 with the first year's sales. Setia Bersama Berhad has a 35% corporate tax rate and a 12% required return.

Answer the questions below and make sure to show all work that led up to your answer.

What is Setia Bersama Berhads net investment outlay on this project?

Construct incremental operating cash flow statements for the project's 5 years of operations.

What is the net non-operating cash flow at the time the project is terminated?

Based on these cash flows, what is the project's NPV? Do these indicators suggest that the project should be undertaken?

Suppose Setia Bersama Berhad loses sales on other models because of the introduction of the new model. How would this affect your analysis?

Setia Bersama Berhad is a midsized plastic molding manufacturer located in Ijok, Selangor. The CEO is Encik Asfan, who inherited the company from his grandfather. Over the years, the company expanded its business and is now a reputable manufacturer of various plastics items. One of the major revenue-producing items manufactured by Setia Bersama Berhad is a Hospital Disposable Bin. Setia Bersama Berhad currently has one disposable bin model, and sales have been excellent. Setia Bersama Berhad spent RM750,000 to develop a prototype for a new hospital disposable bin that is lighter and more user friendly compared with the current model.

The company has spent a further RM200,000 for a marketing study to determine the expected sales figures for the new hospital disposable bin. Setia Bersama Berhad can manufacture the new hospital disposable bin for RM185 each in variable costs. Fixed costs for the operation are estimated to run RM5.3 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000, and 80,000 per year for the next five years, respectively. The unit price of the new hospital disposable bin will be RM480. The necessary equipment can be purchased for RM38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the disposal value of the equipment in five years will be RM5.4 million

As previously stated, Setia Bersama Berhad currently manufactures a hospital disposable bin. Production for the existing model is expected to be terminated in two years. If Setia Bersama Berhad does not introduce the new hospital disposable bin, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing hospital disposable bin is RM310 per unit, with variable costs of RM125 each and fixed costs of RM1.8 million per year.

If Setia Bersama Berhad does introduce the new hospital disposable bin, sales of the existing hospital disposable bin will fall by 15,000 units per year, and the price of the existing units will have to be lowered to RM275 each. Net working capital for the hospital disposable bin will be 20% of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in year 1 with the first year's sales. Setia Bersama Berhad has a 35% corporate tax rate and a 12% required return.

Answer the questions below and make sure to show all work that led up to your answer.

What is Setia Bersama Berhads net investment outlay on this project?

Construct incremental operating cash flow statements for the project's 5 years of operations.

What is the net non-operating cash flow at the time the project is terminated?

Based on these cash flows, what is the project's NPV? Do these indicators suggest that the project should be undertaken?

Suppose Setia Bersama Berhad loses sales on other models because of the introduction of the new model. How would this affect your analysis?

Question 2:

The airline industry is extremely cyclical. For instance, due to a pandemic of Corvid 19, the airline industry has found itself with too many seats and too few passengers as people afraid to travel. Several airlines have filed for bankruptcy. Some have fully recovered, while others have been forced to liquidate. Narrowing profit margins have prompted airlines to develop creative survival tactics.

Sempoi Airlines has successfully found its niche in the industry by providing direct flight service to less traveled routes such as those to and from smaller cities and to focus on low-cost carriers. Since these routes do not generate nearly as much revenue as major city routes, Sempoi has found ways to reduce its costs. Costs are reduced by following a no-frills policy that the travelers refer to as "peanut flights." This means that instead of serving costly meals (the quality of which passengers have historically complained about anyway), Sempoi serves just a bag of peanuts and a soft drink.

With the recent success of short, direct flights, Sempoi is considering the purchase of one such additional route. Before an airline applies to the federal government for a new route, a lengthy analysis is performed to determine the feasibility of the route. Expenses to consider include airport costs such as gate and landing fees and labor costs such as local baggage handlers and maintenance workers. Many times, the airline will provide its own employees to load and unload luggage or to provide upkeep for their planes, but in the case of Sempoi, they have so many small cities to service that the outsourcing of these jobs is not uncommon.

Table 1 provides a summary of the after-tax cash flows associated with the acquiring of an additional small route. All costs and revenues are reflected by the following numbers.

Table 1: Projected Net Cash flows

Year Net Cash Flow (RM) 0 -41 600 000 1 9 000 000 2 12 600 000 3 10 400 000 4 7 800 000 5 4 200 000 6 2 600 000 7 1 000 000 8 1 000 000

The initial costs of the venture (i.e. year 0) reflect the expenses involved with moving employees, MAB filing fees, the initial offering of low fares in order to gain customers, and the high advertising costs necessary to make the public aware of the new route offering.

What is the project's NPV assuming Sempoi has a discount rate of 10%? How do we interpret the NPV?

Assuming that Sempoi has a required payback period of 5 years, should Sempoi accept the additional route? Based on the project's NPV, should it be accepted? If conflicting conclusions occur, which criteria would you follow?

When will conflicts likely occur among the criteria?

(show your workings)

Question 2:

The airline industry is extremely cyclical. For instance, due to a pandemic of Corvid 19, the airline industry has found itself with too many seats and too few passengers as people afraid to travel. Several airlines have filed for bankruptcy. Some have fully recovered, while others have been forced to liquidate. Narrowing profit margins have prompted airlines to develop creative survival tactics.

Sempoi Airlines has successfully found its niche in the industry by providing direct flight service to less traveled routes such as those to and from smaller cities and to focus on low-cost carriers. Since these routes do not generate nearly as much revenue as major city routes, Sempoi has found ways to reduce its costs. Costs are reduced by following a no-frills policy that the travelers refer to as "peanut flights." This means that instead of serving costly meals (the quality of which passengers have historically complained about anyway), Sempoi serves just a bag of peanuts and a soft drink.

With the recent success of short, direct flights, Sempoi is considering the purchase of one such additional route. Before an airline applies to the federal government for a new route, a lengthy analysis is performed to determine the feasibility of the route. Expenses to consider include airport costs such as gate and landing fees and labor costs such as local baggage handlers and maintenance workers. Many times, the airline will provide its own employees to load and unload luggage or to provide upkeep for their planes, but in the case of Sempoi, they have so many small cities to service that the outsourcing of these jobs is not uncommon.

Table 1 provides a summary of the after-tax cash flows associated with the acquiring of an additional small route. All costs and revenues are reflected by the following numbers.

Table 1: Projected Net Cash flows

Year Net Cash Flow (RM) 0 -41 600 000 1 9 000 000 2 12 600 000 3 10 400 000 4 7 800 000 5 4 200 000 6 2 600 000 7 1 000 000 8 1 000 000

The initial costs of the venture (i.e. year 0) reflect the expenses involved with moving employees, MAB filing fees, the initial offering of low fares in order to gain customers, and the high advertising costs necessary to make the public aware of the new route offering.

What is the project's NPV assuming Sempoi has a discount rate of 10%? How do we interpret the NPV?

Assuming that Sempoi has a required payback period of 5 years, should Sempoi accept the additional route? Based on the project's NPV, should it be accepted? If conflicting conclusions occur, which criteria would you follow?

When will conflicts likely occur among the criteria?

(show your workings)