SOLUTIONS MANUAL
CASE
12
Appraising Long-term
Investments at Kreativ
Künste Productions
Instructor’s Manual—Guidance for instructors
This Instructor’s Manual is prepared for the sole purpose of aiding classroom teaching of the cases
found in the Integrated Case Studies for Accounting text. It is strictly not for students or posting.
The solutions/points are mostly suggested guides and instructors are therefore advised to use
their judgement when analysing and discussing the cases. Instructors are encouraged to consider
various alternative views as appropriate.
Synopsis
Kreativ Künste Productions (KKP) is a private company established in 2012 that produces films,
advertisements and stage theatre shows. The company also produces and records music for
publication and manages talents for hire. KKP has plans to expand its business both product- and
market-wise. KKP has been approached by two television companies with requests to make a series
of documentaries for television broadcast for the next five years. According to the finance manager,
Ms Jothy, the initial financial outlay for the documentary project is estimated to cost the company
RM500,000. Among other things, the CEO has asked Ms Jothy to prepare a five-year cash flow
projection for the documentary project and report on the company’s performance for 2018.
Teaching objectives
In this case, students will be able to:
• Evaluate long term decisions using investment appraisal methods
• Analyse the firm’s performance using appropriate ratios
• Use their business acumen to develop an appropriate mission statement
• Apply the Ansoff matrix to identify the product market strategy
Audience for the case
• Undergraduate students studying for accounting and business-related courses
• Postgraduate students studying for accounting and business-related courses
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Solutions Manual
2
Brief suggestion on how the case may be used in class
Opening trigger questions
•
•
•
•
Explain the different methods of evaluating capital investment projects.
How do ratios help determine a firm’s performance?
How do you develop a clear mission statement?
Explain the Ansoff matrix.
Consolidate through self-Learning
• Get students to conduct an internet search of a business similar to KKP and analyse the value chain
activities of such an industry.
Ways in which the class may be conducted
•
•
•
•
Group discussion
Presentation
Individual learning
Literature review and internet search
Suggested answers to application questions
1 Using the information in Appendix 1, evaluate the documentary project using the payback
method and the net present value method.
Payback period = 4 Year 7 months
Net present value
Y0
Cost (RM’000)
Revenue (RM’000)
Production cost
(RM’000)
Non-production
costs (RM’000)
NCF (RM’000)
Tax payable
PY
CY
Tax credit
PY
CY
NCF after tax
DF @ 10%
PV
Y1
Y2
Y3
Y4
Y5
250
(92.5)
300
(115)
320
(124)
380
(151)
420
(169)
(67.5)
(72)
(80)
(95)
(115)
113
116
134
136
(17.4)
(20.1)
(20.1)
(20.4)
500
(500)
90
–
(13.5)
(500)
1
(500)
(13.5)
(16.95)
–
15
15
12
91.5 109.55
0.9091
0.8264
83.18
90.53
Net present value
(16.95)
(17.4)
12
9.6
103.25
0.7513
77.57
9.6
7.68
113.78
0.6830
77.71
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Y6
7.68
29.22
132.4
0.6209
82.21
(20.4)
29.22
8.82
0.5645
4.98
(83.82)
Appraising Long-term Investments at Kreativ Künste Productions
Tax credit workings
Tax credit
Initial cost (‘000)
Tax depreciation
500
(100)
30
PY = –
CY = 15
End of Y1 NBV
Tax depreciation
400
(80)
24
PY = 15
CY = 12
End of Y2 NBV
Tax depreciation
320
(64)
19.2
PY = 12
CY = 9.6
End of Y3 NBV
Tax depreciation
256.0
(51.2)
15.36
PY = 9.6
CY = 7.68
End of Y4 NBV
Tax depreciation
204.80
(40.96)
12.288
PY = 7.68
CY = 6.144*
End of Y5 NBV
Disposal value
Balancing charge Y5
163.84
(10.00)
153.84
46.152
CY = 23.076*
*Y5 amount
PY = 6.144
PY = 23.076
Year 6
• Interpret and discuss the above calculations with the students
2 Evaluate the company’s performance for the year 2018.
Profitability ratios
Operating profit × 100
*Capital employed
*NCA + CA – CL + CE
121 × 100 = 20.2%
585
ROCE =
Profit margin =
Operating profit
Sales
Asset turnover =
Sales
× 100
Capital employed
margin =
Operating profit
Sales
× 100
× 100
121 × 100 = 21.8%
556
556 = 0.95 times
585
352 × 100 = 63.3%
556
Liquidity ratios
Current ratio = CA:CL
273 : 138 = 1.98: 1
Acid test = (CA – Inventory): CL
223 : 138 = 1.62: 1
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3
Solutions Manual
4
Working capital management
Inventory days = Ave. inventrory × 365
COGS
20 × 365 = 35.78 days
204
AR days = Trade debtors × 365
Credit sales
AP days = Trade creditors × 365
*Credit sales
*or COGS
73 × 365 = 47.92 days
556
13 × 365 = 23.26 days
204
• Interpret and discuss the above calculations with the students.
3 Despite having a clear set of strategic objectives the company does not have a mission
statement. The CEO feels that this should be remedied as a matter of urgency. Discuss the
issues which KKP should consider when creating an appropriate mission statement.
Your mission statement should reflect your business’s special niche. Studying other companies’
statements can fuel your creativity. Points that can be considered in the discussion are available
online in the article ‘10 questions to answer when writing your mission statement’ (Entrepreneur,
February 2015): www.entrepreneur.com/article/241954.
Ten questions to help you create an appropriate business mission:
1 Why are you in business?
Think about the spark that ignited your decision to start a business.
2 Who are your customers?
What can you do for to satisfy customer needs?
3 What image of your business do you want to convey?
To customers, suppliers, employees and the public?
4 What is the nature of your products and services?
What factors determine pricing and quality?
5 What level of service do you provide?
Don’t be vague; define what makes your service so extraordinary.
6 What roles do you and your employees play?
What type of leadership style that organizes, challenges and recognizes employees.
7 What kind of relationships will you maintain with suppliers?
To ensure effective supply chain management.
8 How do you differ from competitors?
What do you do better, cheaper or faster than competitors?
9 How will you use technology, capital, processes, products and services to reach your goals?
You need to identify your strategy which will keep goals focused.
10 What underlying philosophies or values guided your responses to the previous questions?
Writing them down clarifies the ‘why’ behind your mission.
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Appraising Long-term Investments at Kreativ Künste Productions
5
4 Discuss where the proposal to make documentaries for television would feature in Ansoff ’s
product–market matrix.
EXISTING
NEW
MARKET
PENETRATION
MARKET
DEVELOPMENT
LOW
RISK
EXISTING
MARKET
NEW
RELATED
PRODUCT
DEVELOPMENT
DIVERSIFICATION
UNRELATED
HIGH
Source: www.business-to-you.com/ansoff-matrix-grow-business/
•
•
•
•
•
The Ansoff matrix consists of four strategies for growth. The matrix (also known as the
product–market expansion grid) allows managers to quickly summarize these potential
growth strategies and compare them to the risk associated with each one.
Market penetration is about selling more of the company’s existing products to existing
markets. To penetrate and grow the customer base in the existing market, a company may
cut prices, improve its distribution network, invest more in marketing and increase existing
production capacity.
Product development is about developing and selling new products to existing markets.
Companies could, for example, make some modifications in the existing products to give
increased value to the customers for their purchase or develop and launch new products
alongside a company’s existing product offering.
Market development is about selling more of the company’s existing products to new
markets. This strategy is about reaching new customer segments or expanding internationally
by targeting new geographic areas.
Diversification strategies are about entering new markets with new products that are either
related or completely unrelated to a company’s existing offering.
In the case of KKP, the development of documentaries for television represent a product
development strategy. However, if the rights of these documentaries are sold to television
industries in other countries, it will also be part of the market development strategy.
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