Question 2 As a new assistant financial analyst at Arnani Berhad, you were called to attend...

 

  

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Question 2 As a new assistant financial analyst at Arnani Berhad, you were called to attend a meeting by Mr Rashad, the CEO of the company. The purpose of the meeting was to make a capital budgeting decision with respect to the introduction and production of a new product an air purifier called Cool Blast. In the face of increased competition and innovation, Arnani Berhad spent large amount of time and money researching and developing a new highly reliable air purifier. The company felt that Cool Blast have many obvious advantages over competitors products. Besides the CEO, the meeting participants included Puan Annie, Director of Marketing, Miss Serene, Vice President in charge of the new products, Mr Lim, Controller and Mr Steve from Quality Department. Miss Serene started the meeting with a presentation related to the cost and cash flow for the new product. In order lo keep things clear, she passed out copies of the projected cash flows to those present as per Table 1. She also provided some insights as to how these calculations were determined. Miss Serene proposed that the initial cost for Cool Blast included RM500,000 for the market testing and RM2,000,000 for a new specialized equipment and packaging facilities. The estimated life for the facilities was 15 years, after which they would have no salvage value and the opportunity cost on funds was 10 percent. CONFICENTIAL Accounting & Finance for Deduon Ma (GSFM7514) April 2020 Fial Examinadion Table 1: Projected Cash Flows (RM) 280,000 280,000 280,000 280,000 280,000 350,000 350,000 350,000 (RM) 350,000 350,000 250,000 250 000 250,000 250,000 250,000 6. 10 11 12 13 14 15 4 6 8 Mr Lim then questioned the fact that no costs were included in the proposed cash budget for plant facilities that would be needed to produce the new product. Miss Serene replied that at the present time, they only using 60 percent of capacity and since these facilities were suitable for use in the production of Cool Blast, no new plant facilities would be needed. Puan Annie then asked if there had been any consideration of increased working capital needs to operate the investment project. Miss Serene answered that there had, the project requires RM200,000 of additional working capital; however, as this money would never leave the firm, it was not considered an outflow. Mr Steve argued that this project should be charged something for its use of current excess plant facilities. His reasoning was that if another firm had space like that, they could generate income from rental out the area. However, Arnani Berhad had a strict policy that prohibit renting or leasing any of its production facilities to any party outside the firm. Required: a) If you were in the place of Miss Serene, would you argue for the cost of market testing to be included in a cash outflow? (4 marks) b) State your opinion on how to deal with the question of working capital? (4 marks) c) Would you suggest that the product be charged for the use of excess production facilities and building space? Why? (4 marks) d) If debt were used to finance this project, should the interest payments associated with this new debt be considered cash flows? Why? (3 marks) e) Calculate the NPV of this project. Would you accept or reject this project? (5 marks) (Total: 20 Marks) "END OF QUESTION PAPER *** Question 2 As a new assistant financial analyst at Arnani Berhad, you were called to attend a meeting by Mr Rashad, the CEO of the company. The purpose of the meeting was to make a capital budgeting decision with respect to the introduction and production of a new product an air purifier called Cool Blast. In the face of increased competition and innovation, Arnani Berhad spent large amount of time and money researching and developing a new highly reliable air purifier. The company felt that Cool Blast have many obvious advantages over competitors products. Besides the CEO, the meeting participants included Puan Annie, Director of Marketing, Miss Serene, Vice President in charge of the new products, Mr Lim, Controller and Mr Steve from Quality Department. Miss Serene started the meeting with a presentation related to the cost and cash flow for the new product. In order lo keep things clear, she passed out copies of the projected cash flows to those present as per Table 1. She also provided some insights as to how these calculations were determined. Miss Serene proposed that the initial cost for Cool Blast included RM500,000 for the market testing and RM2,000,000 for a new specialized equipment and packaging facilities. The estimated life for the facilities was 15 years, after which they would have no salvage value and the opportunity cost on funds was 10 percent. CONFICENTIAL Accounting & Finance for Deduon Ma (GSFM7514) April 2020 Fial Examinadion Table 1: Projected Cash Flows (RM) 280,000 280,000 280,000 280,000 280,000 350,000 350,000 350,000 (RM) 350,000 350,000 250,000 250 000 250,000 250,000 250,000 6. 10 11 12 13 14 15 4 6 8 Mr Lim then questioned the fact that no costs were included in the proposed cash budget for plant facilities that would be needed to produce the new product. Miss Serene replied that at the present time, they only using 60 percent of capacity and since these facilities were suitable for use in the production of Cool Blast, no new plant facilities would be needed. Puan Annie then asked if there had been any consideration of increased working capital needs to operate the investment project. Miss Serene answered that there had, the project requires RM200,000 of additional working capital; however, as this money would never leave the firm, it was not considered an outflow. Mr Steve argued that this project should be charged something for its use of current excess plant facilities. His reasoning was that if another firm had space like that, they could generate income from rental out the area. However, Arnani Berhad had a strict policy that prohibit renting or leasing any of its production facilities to any party outside the firm. Required: a) If you were in the place of Miss Serene, would you argue for the cost of market testing to be included in a cash outflow? (4 marks) b) State your opinion on how to deal with the question of working capital? (4 marks) c) Would you suggest that the product be charged for the use of excess production facilities and building space? Why? (4 marks) d) If debt were used to finance this project, should the interest payments associated with this new debt be considered cash flows? Why? (3 marks) e) Calculate the NPV of this project. Would you accept or reject this project? (5 marks) (Total: 20 Marks) "END OF QUESTION PAPER ***

Answer rating: 100% (QA)

1 No the cost of market testing is not to be included in cash outflow because in initial outlay fixe... View the full answer