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Consulting memorandum on setting up a business and investment strategies

Setting up a Business

Sharon, a long-time classmate, contacted you recently. She is thinking of setting up a business with two other ex-colleagues, Mandy and Terence, to design and sell a specialised posture corrector belt for women. All three of them are expected to be involved in running the day-today operations and will fund the business with their own savings. They do not wish to lose more money than the amount they invest

If the business goes according to plan over the next 12 to 18 months (where sales and customer based have grown significantly, and payments to suppliers are voluminous), she envisages that a finance manager will need to be recruited. Several months down the road, certain decisions relating to procurement of new machinery and renovation of a factory in Tuas will need to be made. Based on her preliminary computations, the cash flows from assets in the first three years is estimated to be -$360,000.

While there is a vision to expand into neighbouring countries like Malaysia, Thailand and Vietnam (where significant funds need to be raised externally), this is not an immediate priority. At some point in time, Sharon would like to divest a portion of her business interest, and donate the proceeds to Singapore Children’s Society, a charitable organisation. 

You have been appointed by Sharon as a consultant. She has requested for you to draft a memorandum to advise her on the matters set-out below.

(a) Examine which of the three (3) forms of business should be used. 

(b) Prioritise the roles and responsibilities of the finance manager who will be hired within the next year or two.

(c) Discuss why negative cash flows from assets during the first three years is not necessarily a bad sign for the business.  

You are 30 years old today and have $50,000 to invest until you retire at 62. Tim, your financial planner, advises you to invest in real estate investment trusts (REITs) which generates 7% return each year. On reaching 50, he advises to re-allocate the investment to a safer investment i.e. Singapore government securities, which yields 3% return each year. 

(a) Solve the amount you will have on retirement. 

(b) Formulate three (3) different strategies to increase the amount on retirement. 

(c) On retirement, you intend to use a portion of your investment to purchase an annuity. Two options have been presented to you: 

Standard plan: $9,000 per year 

Escalating plan: $7,500 in first year, pay-out increase by 2% every year

Pay-outs for both plans start from 65 years onwards and the upfront premium for both plans are the same. Life expectancy in Singapore is 90 years and the discount rate is assumed to be 3%. Compare both annuities and prioritise your options. 

(d) Due to unforeseen events, there is an urgent need to borrow $15,000 to pay for your family member’s medical bills. You could borrow through your credit cards, which charge an interest of 18.5% per year (compounded daily). Alternatively, you can draw down on a cash line facility which charges interest of 20% per year, calculated on a monthly basis. Solve the effective annual rate for the credit cards and cash line facility. Examine which is your preference.  

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