Reference no: EM132460363
Ramadhan AlMubarak Berhad is a midsized plastic manufacturer located in Muar, Johor. The company CEO is Encik Ramadhan, who inherited the company. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various plastics items. One of the major revenue-producing items manufactured by Ramadhan AlMubarak Berhad is a garbage container. Ramadhan AlMubarak Berhad currently has one garbage container model, and sales have been excellent. Ramadhan AlMubarak Berhad spent RM75,000 to develop a prototype for a new garbage container that is lighter and more user friendly compared with the current model..
The company has spent a further RM20,000 for a marketing study to determine the expected sales figures for the new garbage container. Ramadhan AlMubarak Berhad can manufacture the new garbage containers for RM85 each in variable costs. Fixed costs for the operation are estimated to run RM600 000 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 garbage container will be RM150. The necessary equipment can be purchased for RM1.2 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be RM200 000.
As previously stated, Ramadhan AlMubarak Berhad currently manufactures a garbage container. Production for the existing model is expected to be terminated in two years. If Ramadhan AlMubarak Berhad does not introduce the new garbage container, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing garbage container is RM120 per unit, with variable costs of RM65 each and fixed costs of RM800 000 per year.
If Ramadhan AlMubarak Berhad does introduce the new garbage container, sales of the existing garbage container will fall by 15,000 units per year, and the price of the existing units will have to be lowered to RM100 each. Net working capital for the garbage containers 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. Ramadhan AlMubarak 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.
a) What is Ramadhan AlMubarak Berhads' net investment outlay on this project?
b) Construct incremental operating cash flow statements for the project's 5 years of operations.
c) What is the net non operating cash flow at the time the project is terminated?
d) Based on these cash flows, what are the project's NPV and payback? Do these indicators suggest that the project should be undertaken?
e) Suppose Ramadhan AlMubarak Berhad loses sales on other models because of the introduction of the new model. How would this affect your analysis?