FIN 320 Individual Assignment CASE Study PDF

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FACULTY OF BUSINESS AND MANAGEMENT

DIPLOMA IN BANKING STUDIES FINANCIAL ANALYSIS (FIN320) INDIVIDUAL ASSIGNMENT: CASE STUDY

PREPARED BY: NURUL AFIQAH BINTI MADZUKI 2020874062 GROUP: KBA1194B

PREPARED FOR: MADAM HASNI BINTI ABD RAHIM

SUBMISSION DATE: 19 MAY 2022

SP Electronic is a medium electronics manufacturer located in Bakar Arang industrial area. The company was founded 10 years ago with the original operation was repairing video players and other household appliances.

Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronics items. Competition from other company makes this company needs to maintain the quality of their production. Because of that, they need to ensure the machine that they used in their operation must be sophisticated and not outdated.

Currently, this company is considering replacing an existing machine used in production that was purchased 5 years ago for RM125, 000 with a new computer system that could improve the company’s operations. The old machine is being depreciated under the sum of the year digit method, with a useful life of 10 years and no salvage value. Its current market value is RM5, 000.

The operation manager of the company, Mr. Alex has reviewed two (2) options: Machine X imported from China and Machine Y imported from Japan. Below is the information provided for the new machine.

Cost of Asset Freight and transportation cost Installation cost Training cost (to operate the machine) Depreciation method Salvage value Useful life

Machine X RM220,000 RM15,000 RM5,000 NA

Machine Y RM150,000 RM12,000 RM3,000 RM5,000

SYDM RM10,000 5 years

SYDM RM8,000 5 years

The replacement of the old machine will result in the following changes:

Annual sales The annual cost of defects Annual operating cost (exclude depreciation)

Quarterly maintenance cost The initial investment in Net working capital

Old machine RM500,000 RM80,000

Machine X Increase by 30% Decrease by 10%

Machine Y Increase by 20% Decrease by 4%

RM50,000

RM10,000

Remain the same for the first 2 years and increase by 2.5% for the last 3 years Decrease by 1.5%

Increase by 2.5% for the first 2 years and 4% for the last 3 years Increase by 2%

NA

RM30,000

RM20,000

Assume that the company’s cost of capital and tax rate is 10% and 25% respectively. From the replacement plan, calculate: i)

Payback period

ii) Profitability index iii) Net Present Value (NPV) iv) Based on your answers in (i) through (iii), which machine will you finally choose? Why?

MACHINE X

MACHINE Y

Depreciation old machine

Depreciation old machine

= 125 000

= 125 000 10

10 = RM 12 500

= RM 12 500

Depreciation new machine

Depreciation new machine

= (220 000 + 15 000 + 5 000) – 10 000

= (150 000 + 12 000 + 3 000) – 8 000

5

5

= RM 46 000

= RM 31 400

Different in depreciation

Different in depreciation

= 46 000 – 12 500

= 31 400 – 12 500

= RM 33 500

= RM 18 900

Book value old machine

Book value old machine

= Cost of Asset – Accumulated Depreciation

= Cost of Asset – Accumulated Depreciation

= 125 000 – 12 500 (5)

= 125 000 – 12 500 (5)

= RM 62 500

= RM 62 500

Tax Shield (Savings) from sale of old

Tax Shield (Savings) from sale of old

machine

machine

= (Selling Price – Book Value) x Tax Rate

= (Selling Price – Book Value) x Tax Rate

= (5 000 – 62 500) x 25%

= (5 000 – 62 500) x 25%

= (RM14 375)

= (RM14 375)

Net Initial Outlay (NICF)

Net Initial Outlay (NICF)

Outflows Cost of new machine

RM 220 000

Outflows Cost of new machine

RM 150 000

15 000

Freight and transportation cost Installation cost Net working capital Total outflows Inflows Selling price of old

5 000 30 000 270 000 5 000

machine Tax shield Total inflows NICF

14 375 (19 375) 250 625

Year 1 – 2

Year 3 – 5

(RM)

(RM)

150 000 8 000

transportation cost Installation cost Training Net working capital Total outflows Inflows Selling price of old

3 000 5 000 20 000 190 000 5 000

machine Tax shield Total inflows NICF

14 375 (19 375) 170 625

Net Annual Cash Flows (NACF)

Net Annual Cash Flows (NACF)

Inflows Increase in sales Decrease in

12 000

Freight and

150 000 8 000

Inflows Increase in sales Decrease in

Annual cost of

Annual cost of

defects

defects

Year 1 – 2

Year 3 – 5

(RM)

(RM)

100 000 3 200

100 000 3 200

600

Decrease in

600

Decrease in

Quarterly

Quarterly

maintenance

maintenance

cost Total Inflows Less: Outflows Increase in

158 600

158 600

33 500

33 500

cost Total Inflows Less: Outflows Increase in

depreciation

depreciation

expenses Annual

expenses Annual

800

800

104 000

104 000

18 900

18 900

1 250

2 000

20150 83 850

20900 83 100

-

1 250

33500 125 100

34750 123 850

operating cost Total Outflows Net Saving

Before Tax Less: Tax (25%) Net Saving After

31 275 93 825

30 962.5 92 887.5

Before Tax Less: Tax (25%) Net Saving After

20 962.5 62 887.5

20 775 62 325

Tax Add: Increase in

33 500

33 500

Tax Add: Increase in

18 900

18 900

depreciation NACF

127 325

126 387.5

81 787.5

81 225

operating cost Total Outflows Net Saving

depreciation NACF

Terminal Cash Flows

Terminal Cash Flows

= Salvage Value New Machine + Net

= Salvage Value New Machine + Net Working

Working Capital

Capital

= 10 000 + 30 000

= 8 000 + 20 000

= RM 40 000

= RM 28 000

i)

Payback Period (PP)

i)

Payback period (PP)

Year

Cash Flow After Tax

Year

Cash Flow After Tax

0 1 2 3

(RM) 250 625 127 325 127 325 126 387.5

0 1 2 3

(RM) 170 625 81 787.5 81 787.5 81 225

4 5

4 5

126 387.5 126 387.5

81 225 81 225

PP = 1 year + 123 200

PP = 2 year + 7 050

127 325

81 225

ii)

= 1 year + 0.97 year

= 2 year + 0.09 year

= 1.97 year

= 2.09 year

Profitability Index (PI)

ii)

Profitability Index (PI)

Year

Cash Flow

PVIF

PV

Year

Cash Flow

PVIF

PV

1 2 3 4 5

(RM) 127 325 127 325 126 387.5 126 387.5 126 387.5

10% 0.9091 0.8264 0.7513 0.6830 0.6209 Total

(RM) 115 751.16 105 221.38 94 954.93 86 322.66 78 474 480 724.13

1 2 3 4 5

(RM) 81 787.5 81 787.5 81 225 81 225 81 225

10% 0.9091 0.8264 0.7513 0.6830 0.6209 Total

(RM) 74 353.02 67 589.19 61 024.34 55 476.68 50 432.60 308 875.83

PV PI = Total PV/ IO

iii)

PV PI = Total PV/ IO

= 480 724.13/ 250 625

= 308 875.83/ 170 625

= 1.9181

= 1.8103

Net Present Value (NPV)

= 127 325 (PVIFA 10%, 2) + 126 387.5

iii)

Net Present Value (NPV)

= 81 787.5 (PVIFA 10%, 2) + 81 225

(PVIFA 10%, 3) + 40 000 (PVIF 10%, 5) –

(PVIFA 10%, 3) + 28 000 (PVIF 10%, 5) –

250 625

170 625

= 127 325 (1.7355) + 126 387.5 (2.4869) + 40 000 (0.6209) – 250 625 = RM 309 496.61

iv)

= 81 787.5 (1.7355) + 81 225 (2.4869) + 28 000 (0.6209) – 170 625 = RM 190 700.86

Based on my answer from (i) and (iii) to makes the SP Electronic replace the old machine to new machine, I will choose machine X because it has a shorter payback period. Its also has a higher profitability index and higher net present value compared to machine Y....