1. What are the theories, models and implementation in financial management and how the theories will help in practice?
2. Malaysian Airlines Bhd (MAS) is considering a proposal to buy two new passenger aircrafts in order to increase their service capacity. The aircrafts that are being considered are from model Airbus MH370. The price for each aircraft is RM279, 000,000. Generally, it takes two years for Airbus to construct each MH370 aircraft ordered.
The buying process requires MAS to pay down payment, which is 35% of the total aircraft price upon placing the order. The remaining 65% will be paid once the construction process has completed, before the delivery could take place. This is scheduled to be two years from the date where the order is placed. Below is the general information for one Airbus MH370 aircraft:
MAS Airlines Bhd.
Accounting & Financial Department
Aircraft Model – Airbus MH370
COSTS TOTAL AMOUNT REMARKS
Maintenance cost RM5,760,000 per year
All costs are projected to increase by 2% per annum throughout the project’s life.
Salary:
Pilot RM240,000 per year
Air crews RM240,000 per year
Fuel cost RM16,000,000 per year
Insurance RM9,600,000 per year
Aircrafts will be depreciated using simplified straight line depreciation method down to zero.
Each aircraft has 10 years economic life.
Each aircraft is expected to be able to increase MAS’s revenues by RM72, 900,000 during the first year of its operation. The revenue then is projected to increase by 4% per annum throughout the project’s life. Since the aircrafts is the latest model in its class, the company will need to train their pilots and air crews on the aircrafts’ operational aspect. The training which will cost the company RM250, 000 will be conducted in Airbus Training Facility in France only if the aircrafts are purchased.
MAS will finance RM300, 000,000 from the total aircraft price through a loan from one of the local banks at 8.4% per annum. At the end of the project’s life, each of the aircrafts is expected to be sold as used aircraft at prices tabulated as below:
Probabilities
0.20
0.30
0.35
0.15
Aircraft Price (RM)
218,000,240
219,000,420
218,240,240
219,840,460
Two months ago, MAS hired Wong Business Consulting Services Sdn. Bhd. to advise them on the proposal to buy the aircrafts. The consultation cost was RM44, 000 and had already being paid. If the two aircrafts are purchased, MAS will need to rent two hangars owned by Malaysia Airport Bhd. (MAB) for the purpose of aircraft maintenance and repairs. The rental costs for each hangar is RM200, 000 a year. The hangar rental costs will be revised every two years. Based on the discussions with MAB, the hangar rental costs are likely to increase by 2% every time the revision is made.
The corporate tax rate is 24% while the company’s required rate of return is 14%.
A. Based on the information given,
(i) calculate the project’s total initial outlay.
(ii) calculate the annual project cash flows.
(iii) calculate the project’s terminal cash flow.
(iv) how terminal value growth assumptions affect a project’s overall value with the interactive tool: What is your cost of capital?
B. Calculate net present value (NPV) and profitability index (PI) for the project.
C. Calculate the internal rate of return (IRR) for the project.
D. Should MAS proceed with the project? Explain your answer.
E. Assume there is a delay in the aircrafts’ construction process and the delivery could only take place after three years (instead of two years) after the order is placed. Could this project still be a viable project for MAS? Explain your answer.
F. Will Pandemic COVID-19 increase the Cost of Capital in the MAS Airlines Bhd and why? Explain by your strategies.
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