Scenario investment # 1 TA Holding is considering investing in project A, whether to invest in new product with a product life of four years. The cost of the fixed asset investment would be RM3,000,000 in total, with RM1,500,000 payable at once and the rest after one year. The management of TA Holding expect all their investment to justify themselves financially within four years, after which the fixed asset is expected to be sold for $600,000. The new venture will incur fixed costs of RM1,040,00 in the first year, including depreciation of RM400,000. These costs, excluding depreciation, are expected to rise by 10% each year because of inflation. The unit selling price and unit variable cost are RM24 and RM12 respectively in the first year and expected yearly increases because of inflation are 8% and 14% respectively. Annual sales are estimated to be 175,000 units. Scenario investment #2 TA Holding is also considering of investing in a new technology that could improve the company's existing products quality and development. The total investment of this new technology costs RM4,000,000. The initial investment of this new technology is 80% of the total cost. The subsequent 20% payment is paid at the end of the installation period estimated in 6 months' time. This new technology is project to reduce the overall variable cost by 15% for the first year and 10% for the following 4years. The unit selling price is expected to increase because of inflation are 8% and 14% respectively. However, the new technology is able to extend the existing product life cycle for the next 4 years. Annual sales are estimated to increase from 180,000 to 320,000 units. TA Holding money cost of capital is 28% Which of the project is worth investing in? You are required to:- 1. Explain the advantages and disadvantages of the payback method as a technique for initial screening of two or more competing projects. 2. Use calculation of net present value and internal rate of return in your decision making. 3. Explain why capital budgeting is obviously a vital activity in business investment decision. 4. Calculate the break-even-point of both projects venture for four years period assuming the inflation rates increases 2% each year. 5. Which investment scenario would you recommend to TA? 6. If either investment is viable, where would you recommend for TA to seek for financial management?

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1. The payback method is a technique used for initial screening of competing projects. It calculates the length of time required to recoup the initial investment. Here are the advantages and disadvantages of using the payback method:

Advantages:
- Simplicity: The payback method is straightforward and easy to understand, making it a quick initial assessment tool.
- Focus on liquidity: By considering how quickly the initial investment will be recovered, the payback method highlights the project's potential to generate cash flows in the short term.
- Risk assessment: A shorter payback period implies a faster return on investment, which may be preferred, especially when the project carries higher risk.

Disadvantages:
- Ignoring timing differences: The payback method doesn't account for the timing of cash flows beyond the payback period. It treats all cash flows equally, regardless of when they occur.
- Ignoring profitability: The method only focuses on the recovery of the initial investment and does not consider the project's profitability or long-term financial viability.
- Subjectivity: The payback period is a predetermined criterion set by management, which can be subjective and may vary between projects and organizations.

2. To make a decision on which project is worth investing in, we will calculate the net present value (NPV) and internal rate of return (IRR) for each project. NPV compares the present value of expected cash inflows to the present value of cash outflows. IRR is the discount rate that makes the NPV of a project equal to zero.

To calculate NPV and IRR, we need the cash flows for each year and the appropriate discount rate, which is the cost of capital in this case (28%). By discounting the cash flows back to their present value, we can determine which project generates the highest NPV and the highest IRR. A positive NPV and a higher IRR indicate a better investment.

3. Capital budgeting is a vital activity in business investment decision-making for several reasons:
- Allocation of resources: Capital budgeting helps allocate financial resources effectively by identifying projects that create long-term value for the business.
- Evaluation of profitability: It enables businesses to evaluate the profitability of potential investment opportunities and focus on projects that generate positive returns.
- Risk assessment: Capital budgeting considers the risks associated with different investment options, helping businesses make informed decisions and mitigate potential losses.
- Long-term planning: It assists in long-term planning and aligning business strategy with investment decisions, ensuring sustainability and growth.
- Resource optimization: Capital budgeting facilitates optimal utilization of resources, as it helps identify projects with the highest potential returns for a given level of investment.

4. To calculate the break-even point for both projects, we need to consider the annual fixed costs and the selling price of each unit. Assuming the inflation rate increases by 2% each year, we can calculate the break-even point for each project for a four-year period.

The break-even point is the number of units that need to be sold to cover all costs (fixed and variable). Using the selling price, variable cost, and fixed costs, we can determine the break-even point in units for each year of the project. By finding the point where total revenue equals total costs, we can assess the financial feasibility of each project.

5. After calculating the NPV, IRR, and considering the break-even points, it is recommended to invest in the project that has the highest NPV and IRR. These metrics indicate which project is expected to generate the highest returns and create the most value for the company. Therefore, the project with the better financial performance based on NPV and IRR would be the recommended investment for TA Holding.

6. If either investment is viable, TA Holding could consider seeking financial management from various sources:
- Internal financing: Utilizing internal funds or reserves generated from the company's operations.
- Debt financing: Obtaining loans from banks or financial institutions, using the assets or future cash flows of the company as collateral.
- Equity financing: Seeking investment from external sources such as venture capitalists or private equity firms in exchange for ownership shares in the company.
- Government grants or subsidies: Exploring potential support from government programs or incentives available for specific investment projects.
- Crowdfunding: Raising funds from a pool of individuals or small investors through online platforms.
- Partnerships or joint ventures: Collaborating with strategic partners who can provide financial resources and expertise in the relevant industry.

TA Holding should carefully evaluate each option and choose a financial management approach that aligns with their goals, risk appetite, and long-term strategic plans. Professional financial advisors or consultants could also provide valuable guidance in making this decision.