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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