FACULTY OF BUSINESS AND MANAGEMENT

FIN544 INTERNATIONAL FINANCIAL MANAGEMENT

TITLE: CASE STUDY: ALEEYAA ERICA LTD.

PREPARED BY:

NO NAME NO MATRIC
1 ANIS HANANI BINTI JEFRIZIN 2021834156
2 AIN NURSYUHADA BINTI MOHD ASRI 2021858682
3 FAIQAH NADIRA BINTI AZMAN 2021857948
4 NATASYA HANIM BINTI ILIAS 2021864616

PREPARED FOR :
MADAM NURUL SYUHADA BT BAHARUDDIN

SUBMISSION DATE :
2 JULY 2022
 Case Study of Aleeyaa Erica Ltd
Ahmad is considering a new machine that has suggested by Bieanda for Aleeyaa Erica Ltd.
Concerned about the machine, therefore Ahmad asked Bieanda to lead a market survey and
used the result. However, she was not convinced the sales projections presented from the
firm market survey were entirely accurate. Bieanda presenting a draft of financial needed to
Ahmad of a project to supply machine clips annually for Era Jaya Construction Bhd. as follows:
Machine FIN544-ABX Project:
i. 25,000 tons of machine clips annually.
ii. RM2,850,000 investment in threading equipment.
iii. Annual fixed costs estimate will be RM380,000.
iv. Variable costs should be RM120 per ton.
v. Salvage value estimates of RM200,000 after dismantling costs.
vi. Selling price of RM245 per ton.
vii. Initial net working capital investment estimates of RM350,000.
viii. Aleeyaa Erica requires a return of 12 percent.
ix. The marginal tax rate is 40 percent.
(Project Duration= last for 4 years)
Bieanda also reminds Ahmad that accounting will depreciate the initial fixed asset investment
straight-line to zero over the project life. As a financial manager, you need to help Ahmad to
make decision based on information given by Bieanda. You have to advice Ahmad either
Aleeyaa Erica Ltd. should pursue this project or not.
a) Determine the estimated OCF and NPV of this project and give your comment.
b) If Aleeyaa Erica finance department’s estimate initial cost and salvage value
projections are accurate only to within ±15 percent while the fixed cost estimate to
change within ±RM20,000. The sales department also estimate that price is accurate
only to within ±10 percent; and the operation department’s net working capital estimate
is accurate only to within ±5 percent. Compute Ahmad worst-case and best-case
scenario for this project and justify your answer either he still needs to pursue the
project or not.
c) Because of the rapid changes in technology, this would likely force Aleeyaa Erica Ltd.
to increase the quantity supplied to 30,000. For these reasons, Ahmad has asked you
to analyse and prepare the sensitivity of the project OCF to changes in the quantity
supplied and NPV to changes in quantity supplied. Given the sensitivity number you
calculated, is there some minimum level of output below which you wouldn’t suggest
his to operate? Justify your answer.

2
 ANSWERS
QUESTION A

Base
Unit Sales 25,000 tons
Price per unit RM 245 per ton
Variable cost per unit RM 120 per ton
Fixed Cost per unit RM 380,000
Initial Cost RM 2,850,000
Salvage Value RM 200,000
NWC RM 350,000

Pro forma Statement (RM)

Sales 6125000
Variable cost 3000000
Fixed Cost 380000
Depreciation 712500
EBIT 2032500
Taxes 813000
Net Income 1219500
OCF = [Q (P-V) – FC] (1-T) + D(T)

= [25,000 (245-120) – 380,000] (1-0.4) + 712,500(0.4)

= RM1,932,000

SV After Tax = SV (1-T)

= 200,000 (1-0.4)
= RM120,000
0 1 2 3 4
(RM) (RM) (RM) (RM) (RM)
OCF 1,932,000 1,932,000 1,932,000 1,932,000
ΔNWC (350,000)
NWC Rec 350,000
Cap Sep (2,850,000) 120,000
TCF (3,200,000) 1,932,000 1,932,000 1,932,000 2,402,000

NPV : RM2,966,852.44 (by using BAII plus calculator)

Comment: Aleeyaa Erica Ltd. should proceed with this project because the investment
shows to be worthy with an NPV of RM2,966,852.44.

3
QUESTION B

Base Lower Upper

Unit Sales 25000 25000 25000
Price per unit 245 220.5 269.5
Variable cost per unit 120 120 120
Fixed Cost per unit 380000 360000 400000
Initial Cost (15%) 2850000 2422500 3277500
Savage Value (15%) 200000 170000 230000
NWC (5%) 350000 332500 367500

Base Best Worst

Unit Sales 25000 25000 25000
Price per unit 245 269.5 220.5
Variable cost per unit 120 120 120
Fixed Cost per unit 380000 360000 400000
Initial Cost 2850000 2422500 3277500
Savage Value 200000 230000 170000
NWC 350000 332500 367500

4
 Best Case Analysis
Pro forma Statement
Sales 6737500

Variable Cost 3000000

Fixed Cost 360000

Depreciation 605625

EBIT 2771875

Taxes 1108750

Net Income 1663125

SVAT 138000

OCF = [Q(P-V) – FC] (1-T) + D(T)

= [25 000 (269.5-120) – 360 000] (1 - 0.4) + 605 625 (0.4)

= RM 2,268,750

Interest rate = 12%

0 1 2 3 4
(RM) (RM) (RM) (RM) (RM)
2,268,750 2,268,750
OCF 2,268,750 2,268,750
ΔNWC (332,500)
NWC Rec 332,500
Cap Sep (2,422,500) 138,000
TCF (2,755,0000 2,268,750 2,268,750 2,268,750 2,739,250
NPV = RM 4,434,997.59 (Using BAII plus calculator)

5
 Worst Case Analysis
Pro forma statement

Sales 5512500

Variable Cost 3000000

Fixed Cost 400000

Depreciation 819375

EBIT 1293125

Taxes 517250

Net Income 775875

SVAT 102000

OCF = [Q(P-V) – FC] (1-T) + D(T)

= [25 000 (220.5-120) – 400 000] (1 - 0.4) + 819 375 (0.4)

= RM 1,595,250

Interest rate = 12%

0 1 2 3 4
(RM) (RM) (RM) (RM) (RM)

OCF 1,595,250 1,595,250 1,595,250 1,595,250

ΔNWC (367,500)
NWC Rec 367,500
Cap Sep (3,277,500) 102,000
TCF (3,645,000) 1,595,250 1,595,250 1,595,250 2,064,750
NPV = RM1,498,707.28 (by using BAII plus calculator)

Comment: I think Ahmad should proceed with the best case project because the NPV shows
the highest positive value compared to the worst-case value which is RM 4,434,997.59 higher
than RM1,498,707.28 and it is predictable that the investment is worthwhile.

6
QUESTION C
New Base Case (After Justification)

OFC = [Q (P – VC) – FC] (1 – T) + D (T)

= [30,000 (245 – 120) – 380,000] (1 – 0.4) + 712,500 (0.4)

= 2,022,000 + 285,000

= RM2,307,000

Initial Outlay (IO) = (RM2,850,000) SVAT

= SV (1 – T) = 200,000 (1 – 0.4)

= RM120,000

0(RM) 1(RM) 2(RM) 3(RM) 4(RM)

OCF 2,307,000 2,307,000 2,307,000 2,307,000
NWC -350,000
ΔNWC 350,000
Cap. Spend -2,850,000 120,000
TCF -3,200,000 2,307,000 2,307,000 2,307,000 2,777,000

NPV = RM4,105,858.44 (by using BALL plus calculator)

Sensitivity Analysis of Report

Sensitivity of the Project’s OCF to Changes in Quantity Supplied

Quantity Sensitivity

= ΔOCF / ΔQ

= (2,307,000 – 1,932,000) / (30,000 – 25,000)

= 375,000 / 5,000

= RM75

Comment: It shows that for every 5,000 tons increase in quantity, OCF will increase by
RM75.

7
Sensitivity of the Project’s NPV to Changes in Quantity Supplied

Quantity Sensitivity = ΔNPV / ΔQ

= (4,105,858.44 – 2,966,852.43) / (30,000 – 25,000)

= 1,139,006.01 / 5,000

= RM227.80

Comment: It shows that for every 5,000 tons increase in quantity, OCF will increase by
RM227,801.20.

Project’s Minimum Level of Output

NPV Base = NPV Sensitivity x Δ in Quantity

2,966,852.43 = 227.80 x Δ in Quantity

Δ in Quantity = 13,024 tons

Minimum Quantity = 25,000 -13,024

= 11,976 tons

Comment: The computed sensitivity value is 11,976 tons, which does not imply that Ahmad
should run at the minimum level of 11,976 tons. It is to ensure that his company can continue
to produce profits and avoid going bankrupt.