corporate finance

posted by .

You have been hired as a consultant for Melody Harmonitune Sdn. Bhd. (MHSB), a manufacturer of fine zithers, to evaluate a capital budgeting proposal. MHSB observes that the market for zithers is growing quickly. To confirm their observation, the company hired a marketing firm to analyse the zither market, at a cost of RM125,000. An excerpt of the marketing report is as follows:

The zither industry will have a rapid expansion in the next four years. With the brand name recognition that MHSB brings to bear, we feel that the company will be able to sell 3,200, 4,300, 3,900, and 2,800 units each year for the next four years, respectively. Again, capitalising on the name recognition of MHSB, we feel that a premium price of RM780 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued.

MHSB agrees to the suggested price for the first year but intends to raise it by RM20 each year. MHSB also believes that fixed costs for the project will be RM425,000 per year, and variable costs are 15 percent of sales for the first two years. Due to inflation MHSB expects that the variable cost per unit will increase to RM120 and RM123 for the third and fourth year, respectively. The equipment necessary for production will cost RM4.2 million and will be depreciated using the straight-line method down to zero by the end of the project period. However, MHSB estimates that the equipment will have a scrap value of RM250,000 at the end of the fourth year. Net working capital of RM125,000 will be required immediately, and thereafter, the working capital requirements will be at 5 percent of sales. MHSB has a 25 percent tax rate, and the required return on the project is 13 percent.

A. What is the projectâ€™s cash flow for each of the next four years?
(15 marks)

B. What is the payback period? Based on your answer, would you recommend MHSB to invest in this project?
(5 marks)

C. Compute the net present value of the project. Should MHSB proceed with the project? Why or why not?
(5 marks)

• corporate finance -

Please note that no one here will do your work for you. However, we will be happy to read over what YOU THINK and make suggestions and/or corrections.

Similar Questions

Lucy, who owns a saloon, entered into a contract with Beauty Sdn Bhd, a manufacturer of shampoo, for the purchase of 300 boxes of 'high quality, super shining shampoo'. When the product was delivered, Lucy found the shampoo to be very …
2. corporate finance

Another option discussed by Tom, Jessica and Nolan would be to begin a regular dividend payment to shareholders. how would you evaluate this proposal?
3. Corporate Finance

A company wants to build a new factory for increased capacity. Using 3 capital budgeting methods, make a determination about the economic viability of the proposal using the following information. Building a new factory will increase …

Heino Inc. hired you as a consultant to help them estimate their cost of capital. You have been provided with the following data: rRF = 5.0%; MRP = 5.0%; and b = 1.1. Based on the CAPM approach, what is the cost of equity from retained …
5. finance

Define the following terms and identify their role in finance: 1. Finance 2. Efficient Market 3. Primary Market 4. Secondary Market 5. Risk 6. Security 7. Stock 8. Bond 9. Capital 10. Debt 11. Yield 12. Rate of Return 13. Return on …
6. Finance

Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.15. Based on the CAPM approach, what is the cost of equity from …
7. CFinance

You have been hired as a consultant for Melody Harmonitune Sdn. Bhd. (MHSB), a manufacturer of fine zithers, to evaluate a capital budgeting proposal. MHSB observes that the market for zithers is growing quickly. To confirm their observation, …
8. finance

Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = \$0.90; P0 = \$30.00; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from …
9. Finance

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for \$1.42 million in anticipation …
10. Finance

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for \$1.30 million in anticipation …

More Similar Questions

Post a New Question