Subject Code : FIN20014
Country : Malaysia
Assignment Task
 

Details of Assignment
Assume that you are an adviser at PROTECH Ltd, which is analysing the introduction of a new game console named DYNAMIC. This system can be connected with human brain functions and still very much controversial for claimed but yet to be confirmed adverse impacts on human behaviour after prolonged application. Health conscious groups are also lobbying against introduction of such games with probable detrimental effects.
The project manager of PROTECH Ltd needs a detail analysis on this exciting DYNAMIC project. She comes into your office, drops a consultant’s report on your desk, and complains, “We paid these consultants $1.3 million for this report, and I am not sure their financial analysis makes sense, though their estimations seem to be correct. Before we spend $29 million on buying new equipment needed for this project, look it over and give me your opinion.” You open the report and find the following information and estimates:
The project will continue for next 7 years, by that time more reliable information on possible adverse impacts of using DYNAMIC will be available. It is projected that equipment will have economic life of 10 years. After buying the equipment, it requires to renovate the production bay at PROTECH Ltd and install the equipment at a total cost of $1.5 million. These renovation and installation costs are to be considered as capital expenditures.
The equipment will be procured from GERMANY and PROTECH Ltd has to pay 8% import duty on purchase price, whereas the supplier will pay transportation costs of $80,000. These property, plant and equipment (PPE) would be depreciated over its useful life of 10 years using a tax allowable straight-line rate of 10%.
However, the company is planning to sell the equipment at the end of the project for an estimated price of $7 million.
Consultants estimate that 48,000 units DYNAMIC consoles can be sold in the first year with an expected increase by 25% in each year until year 3; afterwards sales are expected to decrease by 20% in each year until the end of the project due to a number of actions by the competitors in the market. Variable operating costs will be 50% of sales. Beginning selling price per console will be $500 that will be increased by 10% in the 4th year and for the rest of the project life. Annual fixed operating cost, excluding depreciation, will be $600,000.
Existing facilities to be used for the DYNAMIC project are coming from another production line that earns net $250,000 per year. That production line will be discontinued on the commencement of DYNAMIC project.
For the duration of the project, PROTECH is also planning to take the service of a market analyst at a cost of $110,000 per year.

Required
Using Excel Spreadsheet, prepare a full analysis to be presented to the project manager of PROTECH Ltd. in evaluating whether either project should be started or not. Your analysis should include the following:
- Table of cash flows (Show all digits, do not convert amounts to $ in million or thousand)
- Use of excel formulae where appropriate (with 3 pages maximum for values and 3 pages maximum for formulae)
- A formal report (excluding table of content, executive summary, tables, references and appendices) outlining your recommendation as to whether PROTECH should
proceed with either project. Justify your recommendations using quantitative and qualitative issues and your analysis of probable risks and benefits relating to the project. A comparative statement using 14 per cent and 21 per cent required rate is to be presented in a separate section in the report.

 

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  • Posted on : July 27th, 2019

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