On April 5, 1992, Mr. Alfred Rico, vice president for finance of Far Eastern Telephone Company...
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On April 5, 1992, Mr. Alfred Rico, vice president for finance of Far Eastern Telephone Company received two proposals for capital investment. Mr. Rico called Ms. Lorna Servillon, manager of the Finance and Budget Department, to come his office to discuss these proposals. Mr. Rico : There were two proposals for the capital investment which just arrived. One is for the acquisition of a P187 M building in Makati and the other is for the purchase of additional cell sites each costing P93.5 M. Ms. Servillon : These are two completely different proposals. One is expected to provide cost savings while the other will give the company additional revenues. I think what makes the choice difficult is that, at the moment, we don't have funds to finance both projects. Mr. Rico : Yes, that is right. I just called our bank and reviewed our financials. It seems that we can only put up P200 M. Probably, later on, we can raise the additional funds necessary. Far Eastern Telephone Company (FETC) Operations and Investment Proposals FETC has two revenue generating divisions, the Plain Old Telephone System Division (POTS) and the CMTS division. POTS contributes 30% of FETC's 1991 net operating revenues while CMTS division accounts 70% of net operating revenue and 99% of net income after tax. The CMTS division has been signing in 2,000 subscribers per month into its expanding network. FETC is the leader in the cellular market with 96% market share. FETC is currently leasing office space from Metro Gate Building and Ocean Bank Building. Rent expense for 1992 and projections for the next 5 years are as follows: 1992 1993 1994 1995 1996 1997 P 9,681,000 15,403,000 17,349,000 19,556,000 22,063,000 24,910,000 To be more competitive, FETC is currently expanding and anticipating that its present office space being leased will soon be inadequate to house its growing administrative and support staff. Currently, FETC is occupying 2,154 sq. m. and additional office space of 1,960 sq. m. is needed. In response to this need, Ms. Servillon scouted around for possible new office/building space. She submitted a proposal to Mr. Rico to purchase the Business Center Building (BCB), a 7-storey building with a penthouse and basement parking, and a net floor area of 5,000 sq. m. BCB is only 80% complete and will have to be renovated at a total cost of P22 M. Completion time is estimated at six months. With renovation, it would have an estimated useful life of 25 years and 30% salvage value. The selling price for the land and building is P165 M. Removable building improvements and furniture from current offices worth P2,915,000 can be moved to another building if FETC decides to purchase the CBC building. The market value of this building is expected to increase by 17% yearly. Major consideration for the company in buying the building is the fact that it is not easy to acquire property in Makati. The only building available for sale in Makati is BCB and if the company decides not to purchase the BCB now they might not find similar properties available for sale in the future. In addition to this proposal to acquire a new building, Ms. Servillon also requested FETC to invest in addition cell sites. The purchase of additional cell sites will add to the systems capacity, decongest call traffic and improve the systems completion rate. One cell site costs P93.5 M. Each cell site can accommodate 10 additional subscribers per channel, with a total of 250 channels; this translates to 2,500 additional subscribers per additional site. Total additional revenue from one cell site is estimated to be P66 M per year. Additional variable expenses * are estimated as follows: 50% PLDT share on usage Space and power rental Trunk charge Leased line charge Franchise tax Income tax P 833,800/ cell site / year P 118,800/ cell site / year P 34,100/ cell site / year 3% of FETC revenue 35% of revenue net of all expenses The cell sites are estimated to have a useful life of 8 years with a 10% salvage value. If FETC decides to purchase the cell sites, it will be operational by 1993. While the two proposals mentioned above look promising, Ms. Servillon noted that FETC may not have adequate funds at the moment to finance both proposals. In fact, it can only finance up to P200 M. From this amount P 165 M will come from a mortgage loan, payable in five equal annual installments. The 18% annual interest is payable at the end of each year. The balance will come from internally generated funds. In evaluating capital investment proposals of this nature, FETC has set a hurdle rate or cost of capital of 25 per cent. If your group is in the position of Mr. Rico and Ms. Servillon, which proposal would you recommend based from your capital budgeting computations? *PLDT share on usage - PLDT being the pioneer in telecommunication system in the Philippines has established interconnecting cables (backbone) that connect the whole Philippines. Smaller regional telephone systems also known as Inter Connecting Companies (ICCs) have to interconnect with PLDT for long distance calls. The PLDT share on usage is the average share of PLDT in revenues generated by the ICCS interconnection. Space and power rental - this is for the space and power consumed by the cell sites. Trunk charge - rental for cable used by PLDT to connect ICCs to the backbone. Lease Line Charge - charge for reserving telephone lines for use by the ICCS. Franchise Tax - Tax paid to the government to operate a telecommunication system. Income Tax - This is the corporate income tax rate of 35%. The only incremental fixed cost is depreciation. On April 5, 1992, Mr. Alfred Rico, vice president for finance of Far Eastern Telephone Company received two proposals for capital investment. Mr. Rico called Ms. Lorna Servillon, manager of the Finance and Budget Department, to come his office to discuss these proposals. Mr. Rico : There were two proposals for the capital investment which just arrived. One is for the acquisition of a P187 M building in Makati and the other is for the purchase of additional cell sites each costing P93.5 M. Ms. Servillon : These are two completely different proposals. One is expected to provide cost savings while the other will give the company additional revenues. I think what makes the choice difficult is that, at the moment, we don't have funds to finance both projects. Mr. Rico : Yes, that is right. I just called our bank and reviewed our financials. It seems that we can only put up P200 M. Probably, later on, we can raise the additional funds necessary. Far Eastern Telephone Company (FETC) Operations and Investment Proposals FETC has two revenue generating divisions, the Plain Old Telephone System Division (POTS) and the CMTS division. POTS contributes 30% of FETC's 1991 net operating revenues while CMTS division accounts 70% of net operating revenue and 99% of net income after tax. The CMTS division has been signing in 2,000 subscribers per month into its expanding network. FETC is the leader in the cellular market with 96% market share. FETC is currently leasing office space from Metro Gate Building and Ocean Bank Building. Rent expense for 1992 and projections for the next 5 years are as follows: 1992 1993 1994 1995 1996 1997 P 9,681,000 15,403,000 17,349,000 19,556,000 22,063,000 24,910,000 To be more competitive, FETC is currently expanding and anticipating that its present office space being leased will soon be inadequate to house its growing administrative and support staff. Currently, FETC is occupying 2,154 sq. m. and additional office space of 1,960 sq. m. is needed. In response to this need, Ms. Servillon scouted around for possible new office/building space. She submitted a proposal to Mr. Rico to purchase the Business Center Building (BCB), a 7-storey building with a penthouse and basement parking, and a net floor area of 5,000 sq. m. BCB is only 80% complete and will have to be renovated at a total cost of P22 M. Completion time is estimated at six months. With renovation, it would have an estimated useful life of 25 years and 30% salvage value. The selling price for the land and building is P165 M. Removable building improvements and furniture from current offices worth P2,915,000 can be moved to another building if FETC decides to purchase the CBC building. The market value of this building is expected to increase by 17% yearly. Major consideration for the company in buying the building is the fact that it is not easy to acquire property in Makati. The only building available for sale in Makati is BCB and if the company decides not to purchase the BCB now they might not find similar properties available for sale in the future. In addition to this proposal to acquire a new building, Ms. Servillon also requested FETC to invest in addition cell sites. The purchase of additional cell sites will add to the systems capacity, decongest call traffic and improve the systems completion rate. One cell site costs P93.5 M. Each cell site can accommodate 10 additional subscribers per channel, with a total of 250 channels; this translates to 2,500 additional subscribers per additional site. Total additional revenue from one cell site is estimated to be P66 M per year. Additional variable expenses * are estimated as follows: 50% PLDT share on usage Space and power rental Trunk charge Leased line charge Franchise tax Income tax P 833,800/ cell site / year P 118,800/ cell site / year P 34,100/ cell site / year 3% of FETC revenue 35% of revenue net of all expenses The cell sites are estimated to have a useful life of 8 years with a 10% salvage value. If FETC decides to purchase the cell sites, it will be operational by 1993. While the two proposals mentioned above look promising, Ms. Servillon noted that FETC may not have adequate funds at the moment to finance both proposals. In fact, it can only finance up to P200 M. From this amount P 165 M will come from a mortgage loan, payable in five equal annual installments. The 18% annual interest is payable at the end of each year. The balance will come from internally generated funds. In evaluating capital investment proposals of this nature, FETC has set a hurdle rate or cost of capital of 25 per cent. If your group is in the position of Mr. Rico and Ms. Servillon, which proposal would you recommend based from your capital budgeting computations? *PLDT share on usage - PLDT being the pioneer in telecommunication system in the Philippines has established interconnecting cables (backbone) that connect the whole Philippines. Smaller regional telephone systems also known as Inter Connecting Companies (ICCs) have to interconnect with PLDT for long distance calls. The PLDT share on usage is the average share of PLDT in revenues generated by the ICCS interconnection. Space and power rental - this is for the space and power consumed by the cell sites. Trunk charge - rental for cable used by PLDT to connect ICCs to the backbone. Lease Line Charge - charge for reserving telephone lines for use by the ICCS. Franchise Tax - Tax paid to the government to operate a telecommunication system. Income Tax - This is the corporate income tax rate of 35%. The only incremental fixed cost is depreciation. On April 5, 1992, Mr. Alfred Rico, vice president for finance of Far Eastern Telephone Company received two proposals for capital investment. Mr. Rico called Ms. Lorna Servillon, manager of the Finance and Budget Department, to come his office to discuss these proposals. Mr. Rico : There were two proposals for the capital investment which just arrived. One is for the acquisition of a P187 M building in Makati and the other is for the purchase of additional cell sites each costing P93.5 M. Ms. Servillon : These are two completely different proposals. One is expected to provide cost savings while the other will give the company additional revenues. I think what makes the choice difficult is that, at the moment, we don't have funds to finance both projects. Mr. Rico : Yes, that is right. I just called our bank and reviewed our financials. It seems that we can only put up P200 M. Probably, later on, we can raise the additional funds necessary. Far Eastern Telephone Company (FETC) Operations and Investment Proposals FETC has two revenue generating divisions, the Plain Old Telephone System Division (POTS) and the CMTS division. POTS contributes 30% of FETC's 1991 net operating revenues while CMTS division accounts 70% of net operating revenue and 99% of net income after tax. The CMTS division has been signing in 2,000 subscribers per month into its expanding network. FETC is the leader in the cellular market with 96% market share. FETC is currently leasing office space from Metro Gate Building and Ocean Bank Building. Rent expense for 1992 and projections for the next 5 years are as follows: 1992 1993 1994 1995 1996 1997 P 9,681,000 15,403,000 17,349,000 19,556,000 22,063,000 24,910,000 To be more competitive, FETC is currently expanding and anticipating that its present office space being leased will soon be inadequate to house its growing administrative and support staff. Currently, FETC is occupying 2,154 sq. m. and additional office space of 1,960 sq. m. is needed. In response to this need, Ms. Servillon scouted around for possible new office/building space. She submitted a proposal to Mr. Rico to purchase the Business Center Building (BCB), a 7-storey building with a penthouse and basement parking, and a net floor area of 5,000 sq. m. BCB is only 80% complete and will have to be renovated at a total cost of P22 M. Completion time is estimated at six months. With renovation, it would have an estimated useful life of 25 years and 30% salvage value. The selling price for the land and building is P165 M. Removable building improvements and furniture from current offices worth P2,915,000 can be moved to another building if FETC decides to purchase the CBC building. The market value of this building is expected to increase by 17% yearly. Major consideration for the company in buying the building is the fact that it is not easy to acquire property in Makati. The only building available for sale in Makati is BCB and if the company decides not to purchase the BCB now they might not find similar properties available for sale in the future. In addition to this proposal to acquire a new building, Ms. Servillon also requested FETC to invest in addition cell sites. The purchase of additional cell sites will add to the systems capacity, decongest call traffic and improve the systems completion rate. One cell site costs P93.5 M. Each cell site can accommodate 10 additional subscribers per channel, with a total of 250 channels; this translates to 2,500 additional subscribers per additional site. Total additional revenue from one cell site is estimated to be P66 M per year. Additional variable expenses * are estimated as follows: 50% PLDT share on usage Space and power rental Trunk charge Leased line charge Franchise tax Income tax P 833,800/ cell site / year P 118,800/ cell site / year P 34,100/ cell site / year 3% of FETC revenue 35% of revenue net of all expenses The cell sites are estimated to have a useful life of 8 years with a 10% salvage value. If FETC decides to purchase the cell sites, it will be operational by 1993. While the two proposals mentioned above look promising, Ms. Servillon noted that FETC may not have adequate funds at the moment to finance both proposals. In fact, it can only finance up to P200 M. From this amount P 165 M will come from a mortgage loan, payable in five equal annual installments. The 18% annual interest is payable at the end of each year. The balance will come from internally generated funds. In evaluating capital investment proposals of this nature, FETC has set a hurdle rate or cost of capital of 25 per cent. If your group is in the position of Mr. Rico and Ms. Servillon, which proposal would you recommend based from your capital budgeting computations? *PLDT share on usage - PLDT being the pioneer in telecommunication system in the Philippines has established interconnecting cables (backbone) that connect the whole Philippines. Smaller regional telephone systems also known as Inter Connecting Companies (ICCs) have to interconnect with PLDT for long distance calls. The PLDT share on usage is the average share of PLDT in revenues generated by the ICCS interconnection. Space and power rental - this is for the space and power consumed by the cell sites. Trunk charge - rental for cable used by PLDT to connect ICCs to the backbone. Lease Line Charge - charge for reserving telephone lines for use by the ICCS. Franchise Tax - Tax paid to the government to operate a telecommunication system. Income Tax - This is the corporate income tax rate of 35%. The only incremental fixed cost is depreciation. On April 5, 1992, Mr. Alfred Rico, vice president for finance of Far Eastern Telephone Company received two proposals for capital investment. Mr. Rico called Ms. Lorna Servillon, manager of the Finance and Budget Department, to come his office to discuss these proposals. Mr. Rico : There were two proposals for the capital investment which just arrived. One is for the acquisition of a P187 M building in Makati and the other is for the purchase of additional cell sites each costing P93.5 M. Ms. Servillon : These are two completely different proposals. One is expected to provide cost savings while the other will give the company additional revenues. I think what makes the choice difficult is that, at the moment, we don't have funds to finance both projects. Mr. Rico : Yes, that is right. I just called our bank and reviewed our financials. It seems that we can only put up P200 M. Probably, later on, we can raise the additional funds necessary. Far Eastern Telephone Company (FETC) Operations and Investment Proposals FETC has two revenue generating divisions, the Plain Old Telephone System Division (POTS) and the CMTS division. POTS contributes 30% of FETC's 1991 net operating revenues while CMTS division accounts 70% of net operating revenue and 99% of net income after tax. The CMTS division has been signing in 2,000 subscribers per month into its expanding network. FETC is the leader in the cellular market with 96% market share. FETC is currently leasing office space from Metro Gate Building and Ocean Bank Building. Rent expense for 1992 and projections for the next 5 years are as follows: 1992 1993 1994 1995 1996 1997 P 9,681,000 15,403,000 17,349,000 19,556,000 22,063,000 24,910,000 To be more competitive, FETC is currently expanding and anticipating that its present office space being leased will soon be inadequate to house its growing administrative and support staff. Currently, FETC is occupying 2,154 sq. m. and additional office space of 1,960 sq. m. is needed. In response to this need, Ms. Servillon scouted around for possible new office/building space. She submitted a proposal to Mr. Rico to purchase the Business Center Building (BCB), a 7-storey building with a penthouse and basement parking, and a net floor area of 5,000 sq. m. BCB is only 80% complete and will have to be renovated at a total cost of P22 M. Completion time is estimated at six months. With renovation, it would have an estimated useful life of 25 years and 30% salvage value. The selling price for the land and building is P165 M. Removable building improvements and furniture from current offices worth P2,915,000 can be moved to another building if FETC decides to purchase the CBC building. The market value of this building is expected to increase by 17% yearly. Major consideration for the company in buying the building is the fact that it is not easy to acquire property in Makati. The only building available for sale in Makati is BCB and if the company decides not to purchase the BCB now they might not find similar properties available for sale in the future. In addition to this proposal to acquire a new building, Ms. Servillon also requested FETC to invest in addition cell sites. The purchase of additional cell sites will add to the systems capacity, decongest call traffic and improve the systems completion rate. One cell site costs P93.5 M. Each cell site can accommodate 10 additional subscribers per channel, with a total of 250 channels; this translates to 2,500 additional subscribers per additional site. Total additional revenue from one cell site is estimated to be P66 M per year. Additional variable expenses * are estimated as follows: 50% PLDT share on usage Space and power rental Trunk charge Leased line charge Franchise tax Income tax P 833,800/ cell site / year P 118,800/ cell site / year P 34,100/ cell site / year 3% of FETC revenue 35% of revenue net of all expenses The cell sites are estimated to have a useful life of 8 years with a 10% salvage value. If FETC decides to purchase the cell sites, it will be operational by 1993. While the two proposals mentioned above look promising, Ms. Servillon noted that FETC may not have adequate funds at the moment to finance both proposals. In fact, it can only finance up to P200 M. From this amount P 165 M will come from a mortgage loan, payable in five equal annual installments. The 18% annual interest is payable at the end of each year. The balance will come from internally generated funds. In evaluating capital investment proposals of this nature, FETC has set a hurdle rate or cost of capital of 25 per cent. If your group is in the position of Mr. Rico and Ms. Servillon, which proposal would you recommend based from your capital budgeting computations? *PLDT share on usage - PLDT being the pioneer in telecommunication system in the Philippines has established interconnecting cables (backbone) that connect the whole Philippines. Smaller regional telephone systems also known as Inter Connecting Companies (ICCs) have to interconnect with PLDT for long distance calls. The PLDT share on usage is the average share of PLDT in revenues generated by the ICCS interconnection. Space and power rental - this is for the space and power consumed by the cell sites. Trunk charge - rental for cable used by PLDT to connect ICCs to the backbone. Lease Line Charge - charge for reserving telephone lines for use by the ICCS. Franchise Tax - Tax paid to the government to operate a telecommunication system. Income Tax - This is the corporate income tax rate of 35%. The only incremental fixed cost is depreciation.
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After careful analysis we recommend that FETC invest in the purchase of additional cell sites The purchase of additional cell sites offers the company more opportunities for growth and profitability T... View the full answer
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