CASE1: HIAP SENG TYRE SDN BHD Hiap Seng Tyre Sdn. Bhd. is a Malaysian tire and t

Question

CASE1: HIAP SENG TYRE SDN BHD Hiap Seng Tyre Sdn. Bhd. is a Malaysian tire and tube manufacturer with its factory located in Shah Alam. Hiap Seng's products obtained ISO-9001 certification. Assume that Hiap Seng has recently developed a new model of tire (called Super Tire) after extensive research and development and that the research and development costs have totaled about RM10 million. A RM5 million market testing expenses has also spent and proved that there is a significant market for the new model. The new model will be put into the market this year and is expected to stay in the market for four years As a financial analyst of Hiap Seng, you have to evaluate and provide recommendation on whether to go ahead with the investment. Except for the initial investment that will occur immediately, all cash flows will occur at year end. To make the new model, Hiap Seng has to initially invest RM140 million in production equipment. The equipment can be sold for RM54 million at the end of four years. Hiap Seng can sell the new model to two distinct markets 1. Original manufacturer market (such as Proton, Perodua, etc)-this market consists primarily of the large automobile companies that buy tires for new cars. The new model is expected to sell for RM38 per tire, and the variable cost of each tire is RM22 2. Replacement market-this market consists of all tires purchased after the automobile has left the factory. The new model in this market is expected to sell for RM59 per tire, and the variable cost of each tire is RM22 which is the same as that in the original manufacturer market The project will incur RM26 million in marketing and general administrative costs the first year, and this cost is expected to increase at the inflation rate in subsequent years. Hiap Seng also intends to raise the selling price of the new tire at the inflation rate. The annual inflation rate is expected to remain constant throughout the project (based on Malaysian inflation rate as at January 2018) Variable costs are expected to increase at 1 percent above the inflation rate (nominal rate)

Explanation / Answer

  

Particulars (Amount In Millions) Cost of Initial Investment 140 Research & Development Costs 10 Testing Expenses 5 Total Cash outflow at the beginning of year 155 Numbers of cars Produced by Automobilers 5.6 Number of tyres required(4 tyres per car) 22.4 Tyre Manufacturers Market(11%) 2.464 Contribution per tyre for Manufactures Market 16 (38-22)per tyre Malaysian Inflation Rate on Jan 2018 Assumed at 2.70% Calculation of Present value of cash inflows

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