Diversifying Business Activities

Satnam Berhad is considering diversifying their business activities and they are currently reviewing two proposals. Proposal A is to launch their own television station whilst Proposal B is a joint venture with Kaboor Limited to launch a satellite that would enable the African region to receive advertisements for both company’s products.

The available data is follows:

Proposal A – TV Station
Initial set-up costs: RM250 million
Annual running costs: RM100 million
Estimated life of project: 5 years
Value of assets released at the end of the project: RM40 million
Increased sales as a result of advertising products: RM60 million in the first year, growing cumulatively by 50% each year for the following four years.

Project B – Satellite
Initial set-up costs: RM700 million
Annual running costs: RM50 million
Value of assets released at the end of the project: RM10 million
(Note: all the above to be shared 50/50 with Kaboor Limited)

Estimated life of the project is 6 years.

Increased sales for Satnam Berhad as a result of advertising their products in the African continent: RM80 million in the first year, growing cumulatively by 20% each year for the following five years.

Funding for both projects would be at a cost of capital of 6%.

Relevant discount factors at 6% p.a. are:
Year Cumulative
1 0.943 0.943
2 0.890 1.833
3 0.840 2.673
4 0.792 3.465
5 0.747 4.212
6 0.705 4.917

Required:
a) Using the net present value method of investment appraisal, critically evaluate the two proposals and make your recommendation to Satnam Berhad.
(29 marks)
b) What other considerations should Satnam Berhad take into account in deciding which Project to pursue?
(6 marks)

Proposal-A

Initial Set Up cost 250
Increased sales evey year 50%
Discount Factor 6%
Year 0 1 2 3 4 5
Initial Set Up cost 250
Sales 60 90 135 202,5 303,75...

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