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The CEO has asked Ms Jothy to prepare a five-year cash flow projection for the documentary project. Appendix 1 shows the details of the projected cash flow. An extract of the companys financial statement for 2018 is also provided in Appendix 2.

The CEO planning a report to the board of directors and has asked Ms Jothy and Mr Ramsey to help by drafting certain sections of this report. As the Financial Manager of KKP, you are required to prepare a report to cover the following :

1. Using the information in Appendix 1, evaluate the documentary project using the payback method and net present value method. (15 Marks)

2. Evaluate the companys performance for the year 2018. (15 Marks)

Background Kreativ Knste 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 also offers film production and other performing arts-related courses for those who are interested in developing their passion and talent in this field. Most of the performing arts courses offered adhere to the Trinity College London syllabus. Students graduating from these courses will obtain certificates from Trinity College London. In the early years, the company used a new technology which had been developed by one of the founders, Ms Tan, which improved the quality of computer-generated imagery and three-dimensional graphics in its films. Ms Tan, the current CEO, has a strong and dynamic personality and has been the driving force behind the development and growth of the business to its present state. In the SCENE early years, most of the production crew were hired part-time on a project-to- project basis. However, over the years, a number of permanent staff have been included in the payroll. KPP deals with all areas of the production from casting, directing and PROD Day Nite Futer managing the artistes to negotiating distribution deals with cinema cha TV channels. KKP conducts performing arts workshops and courses certified by Trinity College London. With such diverse production capai KKP aims to produce life-changing films, documentaries and shows can inspire the masses. Aspiring performers who enrol in its cours plenty of activities and opportunities to work in actual productions to practical knowledge. The company's films have been moderately success in winning client confidence, although KKP has never won any major awada Its aims have been primarily revolved around social upliftment by die transformative positive messages through its productions Currently, the two main streams of revenue for this company are: 1 Video ads production 2 Performing arts workshops and certified courses. Costs The initial costs of investment included purchase of technology-related gadgets, equipinent, tools and software for film and stage thelle productions. Typical operational costs for KKP include the hiring cose for technical expertise, such as cameramen, gaffers, sound engineers, video editors, lighting engineers and art directors who form the production crew. While the company tries to get fresh faces and its own students to go on screen for its productions, which also helps reduce cost of hiring experienced talents, the company still nonetheless pays for its performers food, props, logistics and upkeep. There are times when filming at certain locations may also incur additional costs such as location rental. As KKP also offers certification from Trinity College London for aspiring performers, the company is required to pay a periodic fee to the examining board. Risks Like many businesses, film-makers face the risks inherent with shooting a film on a set with many people. According to the CEO, risks come in many different forms. For instance, production crew members may sometimes be involved in accidents, cast may create issues before, during or after filming, or there may even sometimes be equipment breakdown. Problems with licensing are also not uncommon in the film industry. There can also sometimes be issues with copyrights for the use of locations, music in the productions, logos and artwork. All these are common risks faced by KKP Potential development KKP has plans to expand its business both product and market wise. In view of this plan, Mr Ramsey was recently hired as the business development manager at KKP. Recently, 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. The current equipment and tools are fully utilized for existing production works. Thus, the company has to invest in new digital equipment and tools that accurately capture the real life scenes enacted for the project. Ms Jothy is confident that if the company can raise the initial outlay, the company will be able to generate high stable income for the next five years. The CEO is considering turning the requests down because of the lack of resources to make the series on the timescale required. However, Mr Ramsey and Ms Jothy feel that making these documentaries could be a useful way to expand the business product portfolio and to increase KKP's future revenue. Mr Ramsey also pointed out that there is a growing market for documentary production in Asian countries. Both of them have convinced the CEO that if the current request for documentary production pulls through, there is a high possibility that KKP will be able to expand its business activities into the Asian market. To raise the initial outlay, Ms Jothy has suggested that the company take a bank loan. As a long-time client, the bank is willing to give the full loan at a reasonable interest rate. The cost of capital is estimated as 10%. Appendix 1 420 250 112.5 67.5 189 115 3 Year 0 RM RM000 RM'000 RM'000 RM'000 RM 000 300 320 380 Revenue 135 144 171 Production costs 72 80 95 Non-production costs Notes: 1 Fixed production overhead cost includes RM20,000 for depreciation of the existing equipment. 2 New digital equipment will be purchased to meet the project needs for the next five years. The equipment will have a life of five years, and at the end of that time it will be sold for RM10,000. It will qualify for tax depreciation at the rate of 20% per annum on a reducing balance basis 3 KKP is liable to pay tax on its profits at the rate of 30%. Half of this is payable in the year in which the profit is earned and the remainder is payable in the following year. Appendix 2 Extracts from the company's year-end accounts for 2018 are as follows: RM'000 556 352 121 Revenue Gross profit Operating profit Non-current assets Inventory Cash at bank Short-term borrowings Trade receivables Trade payables 450 50 150 125 73 13

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