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Case Application; Issac & Johan
Read the passage below and the following 3 questions;
Isaac has just completed his A-Level from Methodist College Kuala Lumpur. After the result had been published his father asked him what he would like to do in the future. Isaac was undecided and did not answer. His father advised him to start his own business and to pursue his studies through distance learning mode. Isaac reluctantly agreed. He entered into a partnership agreement with one of his school friends, Johan. They decide to start a business of cold drinks with traditional Malaysian flavors in a fashionable crowded street of Bukit Bintang. Isaac and Johan each invested RM30, 000 as their respective capitals. They wanted to earn good profits. As they were new to the business they did not finalize deadlines for different activities as well as the number of different types of flavored drinks. Because of the novelty of their product, their sales increased on daily basis. Ultimately a stage arose when they were required to expand their business. For this, they did not take any timely action. Johan advised opening another branch in a remote area without looking at the relevance of the place regarding the approach to the branch. Isaac was undecided. They approached Issac’s father for advice. He advised them that their activities ought to be specific, measurable, attainable, relevant, and time-based.
(a) Identify the concept about which Issac’s father advised them
(b) State the importance of the concept identified in (a) above
(c) Also state the three rules that may be followed in the implementation of the concept.
Jobby Ltd is considering whether to purchase a new machine. It will cost $360,000 to purchase and $40,000 to install. It is expected to generate additional annual revenues of $80,000 per year for eight years, at which time it will have no further use or value. Jobby Ltd uses straight line depreciation over the 8 year period. The useful life according to the tax office is 4 years. The corporate tax rate is 30%. The company applies a 7% rate of return to similar projects (the present value factor of an annuity of eight years @ 7% is 5.97). Required:
(a) What is the payback period for this project? (Ignore taxes for part (a)) (3 marks)
(b) What is the cash flow in year zero? (2 marks)
(c) Calculate the tax shield (the incremental cash saving based on depreciation ONLY) for years 1 – 4. (3 marks)
(d) Calculate the NPV of this investment (10 marks) (e) Should the company accept this project? Why or why not? (2 marks)
Scenario: An ice cream manufacturer is about to re-launch their 1 litre range of ice cream. The new gourmet ice cream has a creamier texture and contains 33% more fruit than the original range. The new gourmet ice cream will also cost 5–8% more than the original range. The marketing message will focus on the idea that the new range of gourmet ice cream is “lusciously creamy with a rich fruity flavour”. Explain the concept ‘just noticeable difference’ (j.n.d.) (3 marks). Discuss one (1) way that the ice cream manufacturer could use this concept in their next marketing campaign (3 marks).
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