Page 5 - CIMA May 18 - MCS Day 2 Suggested Solutions

CIMA MAY 2018 – MANAGEMENT CASE STUDY

TASK 3 – INVESTMENT APPRAISAL

Suggested solution

To: Sebastian Cohard

From: Financial Manager

Date: Today

Subject: Midwest airport project talking points

Airport purchase and sale cost

Presumably the airport purchase cost is a figure that has already been discussed and so should be
fairly close to the eventual purchase cost. Paul mentioned that the airport itself had seen better
days so it’s unclear as to why the sale figure is C$5 million higher than the purchase cost,
especially as it doesn’t appear that we are intending to spend any cash on upgrading it. Perhaps
this figure should be revised down.

Legal costs

What are these figures based on? If they’re based on the Northeast airport project do they need
to be adjusted for use of a different legal team or for other anticipated issues, such as the
negotiations for taking over the bus routes taking longer?

Airport operating costs and revenues

Again, what are these based on? Have accurate figures been provided by the airport? Are they
based on the Northeast airport figures?

Inflation

There appears to be no inflation taken into account in the airport operating costs and revenues or
in the net annual bus operating cash flows. Depending on whether costs are inflating at a lower
or higher rate than revenues, this may mean that the value of the project is either understated or
overstated.

Taxation

There do not appear to be any taxation figures included in the numbers. The operating cash flows
of the airport will be subject to taxation, as will the operating cash flows of the bus routes taken
on. Without these included the project value will be overstated.

When the airport is purchased, Menta will acquire some non‐current assets as part of the
purchase. These may have tax depreciation available, which could mean some tax savings for the
business to offset the tax on the operating cash flows while the airport is owned.

92 KAPLAN PUBLISHING