The performance of the emerging markets of Southeast Asia

Compare and contrast the performance of the emerging markets of Southeast Asia
and the developed markets of Western Europe in light of the recent global economic
downturn.
Compare and contrast the performance of the emerging markets of Southeast Asia
and the developed markets of Western Europe in light of the recent global economic
downturn.

Purpose of the assignment
This assignment is a problem-based project. The aim of this assignment is to assess students’ understanding in estimating and analyzing the cash flow of projects and making capital project decisions. This assignment is a group work and aims to assess students’ analytical, computing, critical thinking and teamwork skills. Using the theoretical and conceptual topics discussed in the class, students are expected to estimate the cash flows of projects and conduct capital budgeting analysis using the different capital budgeting techniques.

Question 1 (10 pts)
CAT Company has an excavator assembly machine currently in use which was originally purchased 2 years ago for $40 million. The machine is being depreciated under MACRS using a 5-years recovery period; it has 3 years of usable life remaining. The old machine can be sold today for $42 million. A new machine, using a 3 years MACRS recovery period, can be purchased at a price of $140 million. It requires $2 million to install and get it ready for use and has a 3-years usable life. If the new machine is acquired, the investment in accounts receivable will be expected to rise by $10 million, the inventory investment will increase by $25 million, and accounts payable will increase by $15 million. The earnings before tax are expected to be $70 million for each of the remaining 3 years with the old machine. The new machine is expected to provide earnings before taxes of $120 million in the first year and $130 million for the other two years. At the end of 3 years, the market value of the old machine will equal zero, but the new machine is expected to be sold for $35 million. The firm is subject to a 30% tax rate.
Note: The MACRS table is provided in a separate PDF file.

Required?
(a) Determine the initial cash outflow for the replacement proposal.
(b) Calculate the incremental operating cash flows.
(c) Calculate the terminal cash flow of the project.
(d) Should the company replace the machine? Calculate the NPV and IRR of the project, and make a decision whether the company should replace the old machine.

Question 2 (10 pts)
Suppose that Al Arabia Construction Company wants to apply for a bid to construct a sport complex in Egypt. The construction of the Sport complex is expected to start by early next year and expected to be completed within 4 years period.
The estimated revenues from this project is $40 million per year. However, the variable costs, fixed costs and networking capital of the company increases. The variable costs would be 50% of sales and the fixed overhead costs, excluding depreciation are expected to be $4 million per year. Due to the new project, the company is expected to invest $6 million in working capital at the beginning of the project and it will be fully recovered at the end of the project.
To run the project the company is planning to buy a building worth of $12 million to be used as head-office and residence for employees. The building is expected to depreciate based on a 20-years MACRS rates. By the end of the project life, the building’s market value is predicted to be $7.5 million. In addition, the company plans to buy equipment worth of $8 million. The equipment is expected to be depreciated using the MACRS 5-years depreciation rates. By the end of the project, the scraps of the equipment is expected to be sold for $2 million. The corporate tax rate applicable is 22.5% and the cost of capital of the company is 12%.

Required?
(a) Determine the initial cash outflow for the project.
(b) Calculate the incremental operating cash flows.
(c) Calculate the terminal cash flow of the project.
(d) Should the company accept the bid? Calculate the NPV and IRR of the project, to support your answer.

Question 3 (10 pts)
EMAAR Property is considering an investment proposal to construct a 15-floor residence apartment in Al Marjan Island with 50 two-bedroom plots in each floor. The economic life of the project is expected to be 5 years. The project is planned to start at the beginning of 2022. The initial capital outlay in the first year is predicted to be 1,000 million Dirhams, 300 million Dirhams for the next three years and 200 million Dirhams in the fifth year. These fund allocations are used to cover the variable and fixed costs of the project, excluding the periodic depreciation expenses.
The level of working capital for the project is tabulated below.
Year 1 2 3 4
Working capital (AED) 100 million 100 million 300 million 400 million
Note that the working capital investments are expected to be recovered by the end of the project’s life.
The company is planning to sell each plot at 3 million Dirhams, in which customers are expected to pay 10% of the total cost each year for four years and pay the remaining amount by the end of the fifth year. The company’s capital expenditure of 500 million Dirhams will be invested in equipment and machineries at the beginning of 2022. The company uses a straight line method to compute depreciation on assets. The equipment and machineries are expected to be depreciated to zero at the end of the fifth year, however, to dispose the scraps it will cost the company 2 million Dirhams. The corporate tax rate is 0%.
Required?
(a) Determine the initial cash outflow for the project.
(b) Calculate the incremental operating cash flows.
(c) Calculate the terminal cash flow of the project.
(d) Should the company proceed with the construction of the apartment? Calculate the NPV and IRR of the project to justify your recommendation.

Sample Solution

ACED ESSAYS