Page 6 - CIMA May 18 - MCS Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

Project length

The project is estimated to take the same length of time as the Northeast project. Is there a
reasonable basis for this assumption? With different parties involved and the taking over of bus
routes to two cities to be made, the negotiations could be more protracted.

Cost of capital

The current WACC figure of 15% has been used for the evaluation, but the CEO has said that he
intends for the company to taken on loan financing for the project. A loan of C$100m would
significantly raise Menta’s gearing level and will change the risk level of the business. This could
mean that the existing WACC of 15% is no longer appropriate to evaluate the project.

Bus operating cash flows

It has been assumed that these cash flows start in year 2 and so they have been discounted from
that point. Any delay in securing these cash flows will reduce the value of the project. Any
change in the cost of capital will also affect the present value of these cash flows.

More detail should be presented regarding these cash flows so that we can compare them to our
own revenues and costs on similar routes to see if the numbers appear reasonable or not.

Viability

The present value of the airport purchase and sale alone is substantially negative, meaning that
the project relies completely on securing access to the bus routes to become viable.

Overall the project has a good positive net present value, but changes to the figures will all affect
this, particularly the inclusion of tax and potential changes to the cost of capital.

Summary

Overall a lot more work needs to be done before Menta should commit to this project. The
figures should be reviewed and presented in much more detail to enable a reasonable assessment
to be made. A sensitivity analysis should then be performed to see if there are any factors for
which a reasonably likely change would change the overall project viability.

Qualitative reviews should also be made to assess the likelihood of being able to secure the bus
routes – there may be contracts in place with existing operators that can’t be broken.

Financial manager

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