FIN 320

FINANCIAL ANALYSIS

INDIVIDUAL ASSIGNMENT

MINI CASE STUDY

PREPARED BY:

ANIS UMAIRA BINTI MOHD LUTPI

(2019236906)

CLASS:

D1BA1194G

PREPARED FOR:

MISS WAN ASMA HANIM BINTI WAN MUSTAPHA

Machine TKC

Initial Outlay

Purchase Price 200,000

Freight and transportation cost 10,000 COA = 223,000

Installation cost 5,000

Renovation cost 8,000

Increase Net Working Capital (NWC) 30,000

- Selling Price old machine (5,000)

- Tax shield (23,000)

NICF/Initial Outlay (IO) 225,000

Book Value, BV = COA – accumulated depreciation

= 125,000 – [(125,000 – 0)/10] x 5

= 125,000 – 62,500

= 62,500

Profit/Loss = SP – BV

= 5,000 – 62,500

= - 57,500

Tax shield = - 57,500 x 0.4

= - 23,000
Net Annual Cash Flows

Annual Sales = 20% x 500,000

= RM 100,000

Annual cost of defects = 5% x 80,000

= RM 4,000

Annual operating cost = 2.5% x 50,000

= RM 1,250

Quarterly maintenance cost = 1.5% x 10,000

= 150 x 4

= RM 600

Δ CFBT = ↑ inflow + ↓ outflow

Δ CFBT 1-5 = 100,000 + 4,000 – 1,250 + 600

= RM 103,350

Δ Depreciation 1-5 = [(223,000 – 10,000)/5] – [(125,000 – 0)/10]

= 42,600 – 12,500

= 30,100

Δ CFAT = Δ CFBT (1 – T) + Δ Dep. (T)

Δ CFAT 1-5 = 103,350 (1 – 0.4) + 30,100 (0.4)

= RM 74,050
Terminal Cash Flow

Δ Salvage Value = 10,000 – 0

= RM 10,000

Δ Salvage Value 10,000

+ Recovery of NWC 30,000

TCF 40,000

Table of Net Present Value, NPV

YEAR CFAT PVIF10% PV

1 74,050 0.9091 67,318.86
2 74,050 0.8264 61,194.92
3 74,050 0.7513 55,633.77
4 74,050 0.6830 50,576.15
5 114,050 0.6209 70,813.65
Total PV 305,537.35
- IO 225,000
NPV 80,537.35

Year 5 = Δ CFAT1-5 + TCF

= 74,050 + 40,000

= 114,050
CALCULATE:

i) Payback period.

Machine TKC

YEAR CFAT FOR MACHINE TKC CUMULATIVE CFAT

1 74,050 74,050
2 74,050 148,100
3 74,050 222,150
4 74,050 296,200
5 114,050
IO = 225,000

PB Machine TKC = (4 – 1) + [(225,000 – 222,150)/74,050]

= 3.04 years.

ii) Profitability Index.

PI Machine TKC

PI = Total PV/IO
PITKC = 305,537.35/225,000
= 1.3579
 iii) Internal rate of return (IRR).

Internal rate of return, IRR for Machine TKC

Average CFAT for Machine TKC.

Avg. CFATTKC = (74,050 + 74,050 + 74,050 + 74,050 + 114,050)/5
= 82,050

Approximate or simulated IRR.

225,000 = 82,050 (PVIFA k,5)
PVIFA k,5 = 225,000/82,050
= 2.7422

By looking at PVIFA table in row 5, 2.7422 lies between 24% (2.7454) and 28%
(2.5320). Thus, the approximate or simulated IRR for Machine TKC is between 24% and
28%.

Trial and error. By using the adjusted approximate IRR of 24% as the initial discount
rate, calculations for IRR by using NPV concept are as follows:

At 24% NPVTKC = 74,050 (PVIF 24%,1) + 74,050 (PVIF 24%,2) + 74,050 (PVIF 24%,3) +
74,050 (PVIF 24%,4) + 114,050 (PVIF 24%,5) – 225,000

= 74,050 (0.8065) + 74,050 (0.6504) + 74,050 (0.5245) + 74,050

(0.4230) + 114,050 (0.3411) – 225,000

= 216,948.28 – 225,000

= - RM 8,051.72
 NPV at 24% is negative, therefore, the true IRR should be below 24%. Let discount
rate equals to 20%, calculate the second trial and error:

At 20% NPVTKC = 74,050 (PVIF 20%,1) + 74,050 (PVIF 20%,2) + 74,050 (PVIF 20%,3) +
74,050 (PVIF 20%,4) + 114,050 (PVIF 20%,5) – 225,000

= 74,050 (0.8333) + 74,050 (0.6944) + 74,050 (0.5787) + 74,050

(0.4823) + 114,050 (0.4019) – 225,000

= 237,529.93 – 225,000

= RM 12,529.93

Since the NPV at 20% is positive, RM 12,529.93 and at 24% is negative, RM

8,051.72, the true IRR for Machine TKC is at NPV of zero between 20% and 24%. In order
to estimate the true IRR, interpolation is required.

Therefore, IRR:

PERCENT NPV (RM)

20% 12,529.93
K 0.00
24% -8,051.72
12,529.93

20,581.65

IRRTKC = 20% + (12,529.93/20.581.65) x 4

= 22.44%

iv) Net Present Value (NPV).

NPVTKC = 74,050 (PVIF 10%,1) + 74,050 (PVIF 10%,2) + 74,050 (PVIF 10%,3) +
74,050 (PVIF 10%,4) + 114,050 (PVIF 10%,5) – 225,000

= 74,050 (0.9091) + 74,050 (0.8264) + 74,050 (0.7513) + 74,050

(0.6830) + 114,050 (0.6209) – 225,000

= 305,537.35 – 225,000

= RM 80,537.35
Machine RMR

Initial Outlay

Purchase Price 150,000

Freight and transportation cost 12,000 = 170,000

Installation cost 3,000

Renovation cost 5,000

Training cost 5,000

Increase Net Working Capital 20,000

- Selling Price old machine (5,000)

- Tax shield (23,000)

NICF 167,000

Book Value, BV = COA – accumulated depreciation

= 125,000 - [(125,000 – 0)/10] x 5

= 125,000 – 62,500

= 62,500

Profit/Loss = SP – BV

= 5,000 – 62,500

= - 57,500

Tax shield = - 57,500 x 0.4

= - 23,000
Net Annual Cash Flows

Annual Sales = 35% x 500,000

= RM 175,000

Annual cost of defects = 3% x 80,000

= RM 2,400

Annual operating cost = 4% x 50,000

= RM 2,000

Quarterly maintenance cost = 2% x 10,000

= 200 x 4

= RM 800

Δ CFBT = ↑ inflow + ↓ outflow

Δ CFBT 1-5 = 175,000 + 2,400 – 2,000 – 800

= RM 174,600

Δ Depreciation 1-5 = [(170,000 – 8,000)/5] – [(125,000 – 0)/10]

= 32,400 – 12,500

= 19,900

Δ CFAT = Δ CFBT (1 – T) + Δ Dep. (T)

Δ CFAT 1-5 = 174,600 (1 – 0.4) + 19,900 (0.4)

= RM 112,720
Terminal Cash Flow

Δ Salvage Value = 8,000 – 0

= RM 8,000

Δ Salvage Value 8,000

+ Recovery NWC 20,000

TCF 28,000

Table of Net Present Value, NPV

YEAR CFAT PVIF10% PV

1 112,720 0.9091 102,473.75
2 112,720 0.8264 93,151.81
3 112,720 0.7513 84,686.54
4 112,720 0.6830 76,987.76
5 140,720 0.6209 87,373.05
Total PV 444,672.91
- IO 167,000
NPV 277,672.91

Year 5 = Δ CFAT1-5 + TCF

= 112,720 + 28,000

= 140,720

CALCULATE:
 i) Payback period.

Machine RMR

YEAR CFAT FOR MACHINE RMR CUMULATIVE CFAT

1 112,720 112,720
2 112,720 225,440
3 112,720 IO =
4 112,720
5 140,720 167,000

PB Machine RMR = (2 – 1) + [(167,000 – 112,720)/112,720]

= 1.48 years.

ii) Profitability index.

PI Machine RMR

PI = Total PV/IO
PIRMR = 444,672.91/167,000
= 2.6627

iii) Internal rate of return (IRR).

Internal rate of return, IRR for Machine RMR

Average CFAT for Machine RMR.

Avg. CFATRMR = (112,720 +112,720 + 112,720 + 112,720 + 140,720)/5

= 118,320

Approximate or simulated IRR.

167,000 = 118,320 (PVIFA k,5)

PVIFA k,5 = 167,000/118,320

= 1.4114

By looking at PVIFA table in row 5, 1.4114 lies between 65% (1.4127) and
66% (1.3949). Thus, the approximate or simulated IRR for Machine RMR is between
65% and 66%.

Trial and error. By using the adjusted approximate IRR of 65% as the initial
discount rate, calculations for IRR by using NPV concept rate as follows:

At 65% NPVRMR = 112,720 (PVIF 65%,1) + 112,720 (PVIF 65%,2) + 112,720 (PVIF 65%,3)
+ 112,720 (PVIF 65%,4) + 140,720 (PVIF 65%,5) – 167,000

= 112,720 (0.6061) + 112,720 (0.3673) + 112,720 (0.2226) + 112,720

(0.1349) + 140,720 (0.0818) – 167,000

= 161,529.94 – 167,000

= - RM 5,470.06

NPV at 65% is negative, therefore, the true IRR should be below 65%. Let
discount rate equals to 62%, calculate the second trial and error:
 At 62% NPVRMR = 112,720 (PVIF 62%,1) + 112,720 (PVIF 62%,2) + 112,720 (PVIF 62%,3)
+ 112,720 (PVIF 62%,4) + 140,720 (PVIF 62%,5) – 167,000

= 112,720 (0.6173) + 112,720 (0.3810) + 112,720 (0.2352) + 112,720

(0.1452) + 140,720 (0.0896) – 167,000

= 168,015.58 – 167,000

= RM 1,015.58

Since the NPV at 62% is positive RM 1,015.58 and at 65% is negative RM

5,470.06, the true IRR for Machine RMR is at NPV of zero between 62% and 65%. In
order to estimate the true IRR, interpolation is required.

Therefore, IRR:
PERCENT NPV (RM)
62% 1,015.58
K 0.00
1,015.58
65% -5,470.06
6,485.64

IRRRMR = 62% + (1,015.58/6,485.64) x 3

= 62.47%

iv) Net Present Value (NPV).

NPVRMR = 112,720 (PVIF 10%,1) + 112,720 (PVIF 10%,2) + 112,720 (PVIF 10%,3) +
112,720 (PVIF 10%,4) + 140,720 (PVIF 10%,5) – 167,000

= 112,720 (0.9091) + 112,720 (0.8264) + 112,720 (0.7513) + 112,720

(0.6830) + 140,720 (0.6209) – 167,000

= 444,672.91 – 167,000

= RM 277,672.91

Based on your answers in (i) through (iv), which machine will you finally choose? Why?
 Based on the above answers, the machine that I will choose is Machine RMR. First
reason why I choose Machine RMR than Machine TKC is because, based on payback
period (PB), Machine RMR can cover recover the initial costs faster than Machine TKC and
thus, it can reduce risks and increases liquidity. Second reason is based on profitability index
(PI), the value of PI of Machine RMR is greater than Machine TKC. Third reason is based on
internal rate of return (IRR), the value of IRR of Machine RMR is higher, which is 62.47%
compared to Machine TKC, which is at 22.44%. The last reason is based on net present
value (NPV), the value of NPV of Machine RMR is higher than Machine TKC and it will better
to increase the firm’s value.