Tunku Puteri Intan Safinaz School of Accountancy

ADVANCED FINANCIAL MANAGEMENT: GROUP D

FIRST SEMESTER 2018/2019 SESSION (A181)

INDIVIDUAL ASSIGNMENT

Submitted to:
DR. HASNIZA BINTI MOHD TAIB

Prepared by:

Date of Submission: 9 DECEMBER 2018

BWFF2043 Advanced Financial Management (Individual Exercise)

Air Asian Bhd. (AAB) is one of the local airline companies that involves in providing airline
services for both domestic and international flights. AAB is now considering a proposal to
buy two new passenger aircrafts in order to increase its service capacity.

The aircrafts that are being considered are from model Boing 757-900. The price for each
aircraft for that particular model is RM49,240,000. The buying process requires AAB to pay
40% from the total aircraft cost in advance, while the remaining 60% will be paid at the time
the aircrafts are received by AAB, which is scheduled one year from the date the reservations
are made.

Below are the general information for one Boing 757-900 aircraft:

Air Asian Bhd.

Financial Planning Department
Model - Boing 757-900

 Economic life 16 years

 Maintenance cost RM52,000 per month
 Salary:
(i) Pilot RM17,000 per month
(ii) Air crews RM12,800 per month
 Fuel cost RM1,424,000 per
year
 Insurance RM1,800,000 per
year
 Aircrafts will be depreciated using simple straight line depreciation
method

Each aircraft is expected to be able to increase AAB’s revenue by RM18,400,000 a year.

Since both aircrafts are 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
RM54,000 will be conducted only if the aircrafts were purchased.

AAB will finance RM30,000,000 from the total aircraft cost through a loan from one of the
local banks at 12.4% a year. 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 Aircraft Price (RM)

0.20 18,000,240
0.30 19,000,420
0.35 18,240,240
0.15 19,840,460

Two months ago, AAB had hired Sindora Consulting Services Sdn. Bhd. to advise them on
the proposal to buy the aircrafts. The consultation cost was RM24,000 and has already being
paid.
If the two aircrafts were purchased, AAB will need to rent two hangars owned by Malaysia
Airport Bhd. for the purpose of maintenance and repairs. The rental cost for each hangar is
RM42,000 a year.

The corporate tax rate is 28% while the company’s required rate of return is 24%.

A. Based on the information given,

(i) calculate the project’s total initial outlay.

INITIAL OUTLAY (RM)

Reservation Cost of Asset (RM49,240,000 x 2 x 40%) (39,392,000)
Training (54,000)
Depreciable asset (39,446,000)
PV of Balance Cost of Asset (60%) T=1 (PVIF24%, 1) (47,651,613)
Total initial outlay (87,097,613)

T=1 (PVIF24%, 1) = [(RM49,240,000 x 2 x 60%) / (1.24) ^1]

= 47,651,613

(ii) calculate the annual project cash flows.

ANNUAL CASH FLOW (RM)

Revenue (RM18,400,000 x 2) 36,800,000
(-) Operating cost (8,495,200)
(-) Depreciation (RM39,446,000 / 16) (2,465,375)
Earning Before Tax (EBT) 25,839,425
(-) Tax (0.28 x RM25,839,425) (7,235,039)
Earning After Tax (EAT) 18,604,386
(+) Depreciation reversal 2,465,375
Annual Cash Flow 21,069,761

OPERATING COST (RM)

Maintenance cost (RM52,000 x 12 x 2) 1,248,000
Salary: Pilot (RM17,000 x 12 x 2) 408,000
Air Crews (RM12,800 x 12 x 2) 307,200
Fuel cost year (RM1,424,000 x 2) 2,848,000
Insurance year (RM1,800,000 x 2) 3,600,000
Rental (RM42,000 x 2) 84,000
Total Operating Cost 8,495,200

\
 (iii) calculate the project’s terminal cash flow.

TERMINAL CASH FLOW (RM)

Salvage Value 18,660,327
(-) Tax effect of capital gain (0.28 x RM18,660,327) (5,224,892)
Terminal Cash Flow 13,435,435

Salvage value = [(0.20 x RM18,000,240) + (0.30 x RM19,000,420) + (0.35 x RM18,240,240)

+ (0.15 x RM19,840,460)]
= RM18,660,327

B. Calculate net present value for the project.

1
1− RM 13,435,435
NPV = (RM87,097,613) + RM21,069,761 1.24 16 +
[ ] 1.2416
0.24
= (RM87,097,613) + RM84,980,702.63 + RM430,035.96
= (RM1,686,874)

C. Calculate the internal rate of return (IRR) for the project.

Discount Rate Computed NPV

23 RM1,661,843
IRR X
24 (RM1,686,874)

1
1− 16
RM 13,435,435
NPV at 23% = (RM87,100,472) + RM21,069,761 1.23 + 16
[ ] 1.23
0.23
= (RM87,097,613) + RM88,269,936.84+ RM489,519.45
= RM1,661,843

IRR = 23% + [(24%-23%) x (RM1,661,843 - 0) / (RM1,661,843 – (RM1,686,874)]

= 23% + [(-1%) x RM1,661,843 / RM3,348,717]
= 23% + [(1%) x 0.4963]
= 0.23 @ 23%

D. Should AAB proceed with the project? Explain your answer.

Since the NPV is negative, AAB should not proceed with the project. This project
requires an initial investment of RM87,097,613 and generates futures cash flows that
have a present value of (RM1,686,874). Consequently, the project cash flows are
RM21,069,761 less than the required investment which shows that it is not an
acceptable project.