National Sweets SAOG is a very successful company which produces and sells a variety of cookies...

 

Transcribed Image Text:

National Sweets SAOG is a very successful company which produces and sells a variety of cookies and biscuits in Oman and many other parts of the world. The company has received the best company award many a times in the past. The company has a vibrant export track record and currently exports its products to 15 countries in Asia and the Middle East. To meet the increased demand for cookies and biscuits in Oman, the company is planning to establish a new production unit either in Turkey or in Indonesia. After producing the product in either one of these countries, NATIONAL SWEETS will import the product to Oman to meet local demand for biscuits. The company also plans to re-export 25% of the import (after repackging) to Canada to be sold under the brand name TID-BITS. The local sale price of each carton of biscuits: 1.200 Rials (of which 10% will be selling expenses) Sale price in Canada for each carton of TID_BITS: 6 Canadian S (of which 10% will be selling expenses) Repackaging cost and transport cost : 5% of sale price. Expected Level of Imports from Turkey / Indonesia: 60,000 cartons per month. The imports will increase by 10% every year for the next 5 years Production Costs: If the new production unit is established in Turkey the company expects the production cost per carton to be: 2.5 TRY (Turkish Lira) Transport expenses from Turkey to Oman will be 6% of production cost per carton The company requires 2.5 million TRY to establish the production unit If the new production unit is established in Indonesia the company expects the production cost per carton to be: 15,000 IDR (Indonesian Rupiah) Transport expenses from Indonesia to Oman will be 8% of production cost per carton The company requires 7500 million IDR to establish the production unit Financing Given its current debt equity ratio, the company feels that it can easily get a loan for the full amount required for the new factory. National Biscuit Company is considering two sources of finance to get the funds required for the establishing the new production unit. Every year the company will repay interest plus 20% of the borrowed amount ( so that by end of year 5 the loan is fully repaid) For the purpose of financing the new factory, the company has two choices: 1. Omani Rial loan for 5 years at a fixed rate of 7% per annum 2. Loan from Euro Credit market in Euros on a floating rate basis: LIBOR + 5% (Collect data on LIBOR rates for the last five years, and assume different interest rate scenarios for the future, which may be either more optimistic, pessimistic or similar to the past) Exchange Rates: Collect data related to current exchange rates from the internet or any financial newspaper. Exchange rates are expected to either increase or decrease by 25% over the next 5 years. (Collect data on the behavior of the relevant exchange rates in the last five years and use this data in forecasting alternative exchange rate scenarios) Assume no taxes and no inflation. Required: What are the alternate scenarios in front of the company's management (Minimum four scenarios) • Calculate the impact on annual cash flows (in OMR) of the new proposal under each scenario (You may make additional assumptions if necessary, but these should be clearly stated) -Should the company choose Turkey or Indonesia for the new productions unit? Recommend your choice. Give reasons and explain Notes: You may use other capital investment appraisal techniques such as NPV or IRR also if you so desire. National Sweets SAOG is a very successful company which produces and sells a variety of cookies and biscuits in Oman and many other parts of the world. The company has received the best company award many a times in the past. The company has a vibrant export track record and currently exports its products to 15 countries in Asia and the Middle East. To meet the increased demand for cookies and biscuits in Oman, the company is planning to establish a new production unit either in Turkey or in Indonesia. After producing the product in either one of these countries, NATIONAL SWEETS will import the product to Oman to meet local demand for biscuits. The company also plans to re-export 25% of the import (after repackging) to Canada to be sold under the brand name TID-BITS. The local sale price of each carton of biscuits: 1.200 Rials (of which 10% will be selling expenses) Sale price in Canada for each carton of TID_BITS: 6 Canadian S (of which 10% will be selling expenses) Repackaging cost and transport cost : 5% of sale price. Expected Level of Imports from Turkey / Indonesia: 60,000 cartons per month. The imports will increase by 10% every year for the next 5 years Production Costs: If the new production unit is established in Turkey the company expects the production cost per carton to be: 2.5 TRY (Turkish Lira) Transport expenses from Turkey to Oman will be 6% of production cost per carton The company requires 2.5 million TRY to establish the production unit If the new production unit is established in Indonesia the company expects the production cost per carton to be: 15,000 IDR (Indonesian Rupiah) Transport expenses from Indonesia to Oman will be 8% of production cost per carton The company requires 7500 million IDR to establish the production unit Financing Given its current debt equity ratio, the company feels that it can easily get a loan for the full amount required for the new factory. National Biscuit Company is considering two sources of finance to get the funds required for the establishing the new production unit. Every year the company will repay interest plus 20% of the borrowed amount ( so that by end of year 5 the loan is fully repaid) For the purpose of financing the new factory, the company has two choices: 1. Omani Rial loan for 5 years at a fixed rate of 7% per annum 2. Loan from Euro Credit market in Euros on a floating rate basis: LIBOR + 5% (Collect data on LIBOR rates for the last five years, and assume different interest rate scenarios for the future, which may be either more optimistic, pessimistic or similar to the past) Exchange Rates: Collect data related to current exchange rates from the internet or any financial newspaper. Exchange rates are expected to either increase or decrease by 25% over the next 5 years. (Collect data on the behavior of the relevant exchange rates in the last five years and use this data in forecasting alternative exchange rate scenarios) Assume no taxes and no inflation. Required: What are the alternate scenarios in front of the company's management (Minimum four scenarios) • Calculate the impact on annual cash flows (in OMR) of the new proposal under each scenario (You may make additional assumptions if necessary, but these should be clearly stated) -Should the company choose Turkey or Indonesia for the new productions unit? Recommend your choice. Give reasons and explain Notes: You may use other capital investment appraisal techniques such as NPV or IRR also if you so desire.

Answer rating: 100% (QA)

What are the alternate scenarios in front of the companys management Minimum four scenarios ANSWER The companys management has four possible scenarios in front of them 1 The company establishes a new ... View the full answer