FIN320 CASE Study PDF

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Summary

OLD MACHINEn = 5 YEARN = 10 YEARPurchase Price = RMSalvage Value = 0Selling Price = RMTax rate = 40%Cost of capital = 10% COA = Purchase Price + Other Cost = 125000 + 0 = RM 125000 SLM = (COA – SV) / N = (125000 – 0) / 10 = RM 12500 BVn = COA – SLM (n) = 125000 – 12500 (5) = RM 62500 P/L = SP – BVn ...

Description

OLD MACHINE n = 5 YEAR N = 10 YEAR Purchase Price = RM125000 Salvage Value = 0 Selling Price = RM5000 Tax rate = 40% Cost of capital = 10%

1) COA = Purchase Price + Other Cost = 125000 + 0 = RM 125000

2) SLM = (COA – SV) / N = (125000 – 0) / 10 = RM 12500

3) BVn = COA – SLM (n) = 125000 – 12500 (5) = RM 62500

4) P/L = SP – BVn = 5000 – 62500 = (RM 57500)

5) Tax Shield = (57500) x 40% = (RM 23000)

NEW MACHINE MACHINE TKC

MACHINE RMR

PURCHASE PRICE = RM 200000

PURCHASE PRICE = RM 150000

FREIGHT AND TRANSPORTATION COST = RM 10000

FREIGHT AND TRANSPORTATION COST = RM12000

INSTALLATION COST = RM 5000

INSTALLATION COST = RM 3000

RENOVATION COST = RM 8000

RENOVATION COST = RM 5000

SALVAGE VALUE = RM 10000

TRAINING COST = RM 5000

N = 5 YEARS

SALVAGE VALUE = RM 8000

INCREASE IN SALES = RM 100000

N = 5 YEARS

DECREASE IN COST DEFECTS = RM 4000

INCREASE IN SALES = RM 175000

INCREASE IN OPERATING COST = RM 1250

DECREASE IN COST DEFECTS = RM 2400

DECREASE IN MAINTENANCE COST = RM 150

INCREASE IN OPERATING COST = RM 2000

INCREASE IN NWC = RM 30000

INCREASE IN MAINTENANCE COST = RM 200 INCREASE IN NWC = RM 20000

1) COA = PP + OTHER COST

1) COA = PP + OTHER COST

= 200000 + 10000 + 5000 + 8000

= 150000 + 12000 + 3000 + 5000

= RM 223000

= RM 170000

2) SLM = (COA – SV) / N

2) SLM = (COA – SV) / N

= (223000 – 10000) / 5

= (170000 – 8000) / 5

= RM 42600

= RM 32400

3) CHANGES OF SLM = 42600 – 12500 = RM 30100

3) CHANGES OF SLM = 32400 – 12500 = RM 19900

4) CHANGES OF SV = 10000 – 0

4) CHANGES OF SV = 8000 – 0

= RM 10000

= RM 8000

CAPITAL BUDGETING MACHINE TKC MACHINE TKC

RM

INITIAL OUTLAYS (NET INITIAL CASH FLOW) INFLOWS: SELLING PRICE (OLD MACHINE)

5000

(+) TAX SHIELD

23000

NET INFLOWS

28000

OUTFLOWS: PURCHASE PRICE (NEW MACHINE) (+) INSTALLATION COST

200000 5000

FREIGHT AND TRASNPORTATION COST

10000

RENOVATION COST

8000

(+) INCREASE IN NWC

30000

NET OUTFLOWS

253000

NET INITIAL OUTLAYS

(225000)

MACHINE TKC

RM

NET ANNUAL CASH FLOW (NACF) INFLOWS: INCREASE IN SALES

100000

(+) ANY DECREASE IN COST -

DECREASE IN COST DEFECTS

4000

-

DECREASE IN MAINTENANCE COST

600

TOTAL CASH INFLOWS

104600

OUTFLOWS: (+) ANY INCREASE IN COST -

INCREASE IN OPERATING COST

1250

-

INCREASE IN DEPRECIATION

30100

TOTAL CASH OUTFLOWS

31350

EBT

73250

(-) TAX (40%)

(29300)

EAT

43950

(+) CHANGES IN DEPRECIATION

30100

NACF 1-n

74050

TERMINAL CASH FLOW CHANGES IN SV

10000

(+) INCREASE IN NWC

30000

TCF

40000

CAPITAL BUDGETING MACHINE RMR

MACHINE RMR

RM

INITIAL OUTLAYS (NET INITIAL CASH FLOW) INFLOWS: SELLING PRICE (OLD MACHINE)

5000

(+) TAX SHIELD

23000

NET INFLOWS

28000

OUTFLOWS: PURCHASE PRICE (NEW MACHINE)

150000

(+) FREIGHT AND TRASNPORTATION COST

12000

INSTALLATION COST

3000

RENOVATION COST

5000

TRAINING COST

5000

(+) INCREASE IN NWC

20000

NET OUTFLOWS

195000

NET INITIAL OUTLAYS

(167000)

MACHINE RMR

RM

NET ANNUAL CASH FLOW (NACF) INFLOWS: INCREASE IN SALES

175000

(+) ANY DECREASE IN COST -

DECREASE IN COST DEFECTS

TOTAL CASH INFLOWS

2400 177400

OUTFLOWS: (+) ANY INCREASE IN COST -

INCREASE IN OPERATING COST

2000

-

INCREASE IN MAINTENANCE COST

800

-

INCREASE IN DEPRECIATION

TOTAL CASH OUTFLOWS

19900 22700

EBT

154700

(-) TAX (40%)

(61880)

EAT

92820

(+) CHANGES IN DEPRECIATION

19900

NACF 1-n

112720

TERMINAL CASH FLOW CHANGES IN SV

8000

(+) INCREASE IN NWC

20000

TCF

28000

(i)

PAYBACK PERIOD

PB = (Yr. – 1) + I.O – Cumulative CF before Yr. CF at Yr.

YEAR

CF MACHINE TKC

CUMULATIVE CF

CF MACHINE RMR

CUMULATIVE

(RM)

MACHINE TKC

(RM)

MACHINE RMR

(RM)

(RM)

0

(225000)

(167000)

1

74050

74050

112720

112720

2

74050

148100

112720

225440

3

74050

222150

112720

338160

4

74050

296200

112720

450880

5

114050

410250

140720

591600

MACHINE TKC PB = (4 – 1) + (225000 – 222150) / 74050 = 3 + 0.0385 = 3.0385 years

MACHINE RMR PB = (2 – 1) + (167000 – 112720) / 112720 = 1 + 0.4815 = 1.4815 years

(ii)

PROFITABILITY INDEX PI = PV of Cash Flow / Initial Outlay

MACHINE TKC YEAR

CASH FLOW (RM)

PVIF 10%

PV (RM)

1

74050

0.9091

67318.86

2

74050

0.8264

61194.92

3

74050

0.7513

55633.77

4

74050

0.6830

50576.15

5

114050

0.6209

70813.65 ∑ PV = 305537.35

PROFITABILITY INDEX = 305537.35 / 225000 = 1.3579

MACHINE RMR YEAR

CASH FLOW (RM)

PVIF 10%

PV (RM)

1

112720

0.9091

102473.75

2

112720

0.8264

93151.81

3

112720

0.7513

84686.54

4

112720

0.6830

76987.76

5

140720

0.6209

87373.05 ∑ PV = 444672.91

PROFITABILITY INDEX = 444672.91 / 167000 = 2.6627

(iii)

INTERNAL RATE OF RETURN (IRR)

MACHINE TKC YEAR 1

CASH FLOW (RM) 74050

2

74050

3

74050

4

74050

5

114050

Average CFAT = [74050 + 74050 + 74050 + 74050 + 114050] / 5 = 410250 / 5 = RM 82050 Initial Outlay = Average CFAT (PVIFA k,5) 225000 = 82050 (PVIFA k,5) (PVIFA k,5) = 225000 / 82050 (PVIFA k,5) = 2.7422

(Between 20% and 24%) YEAR

CASH FLOW (RM)

PVIF 20%

PV (RM)

1

74050

0.8333

61705.87

2

74050

0.6944

51420.32

3

74050

0.5787

42852.74

4

74050

0.4823

35714.32

5

114050

0.4019

45836.70 ∑ PV = 237529.95

NPV = PV OF CASH FLOW – INITIAL OUTLAY = 237529.95 – 225000 = RM 12529.95

YEAR

CASH FLOW (RM)

PVIF 24%

PV (RM)

1

74050

0.8065

59721.33

2

74050

0.6504

48162.12

3

74050

0.5245

38839.23

4

74050

0.4230

31323.15

5

114050

0.3411

38902.46 ∑ PV = 216948.29

NPV = PV OF CASH FLOW – INITIAL OUTLAY = 216948.29 – 225000 = (RM 8051.71)

i) ii)

PERCENTAGE

NPV

20%

RM 12529.95

_______

RM 0.00

24%

(RM 8051.71)

RM 12529.95 – RM0.00 = RM 12529.95 RM 12529.95 – (RM8051.71) = RM 20581.66 IRR = 20% + (12529.95 / 20581.66) x 4 = 22.4351%

MACHINE RMR YEAR 1

CASH FLOW (RM) 112720

2

112720

3

112720

4

112720

5

140720

Average CFAT = [112720 + 112720 + 112720 + 112720 + 140720] / 5 = 591600 / 5 = RM 118320 Initial Outlay = Average CFAT (PVIFA k,5) 167000 = 118320 (PVIFA k,5) (PVIFA k,5) = 167000 / 118320 (PVIFA k,5) = 1.4114

(Between 62% and 64%) YEAR

CASH FLOW (RM)

PVIF 62%

PV (RM)

1

112720

0.6173

69582.06

2

112720

0.3810

42946.32

3

112720

0.2352

26511.74

4

112720

0.1452

16366.94

5

140720

0.0896

12608.51 ∑ PV = 168015. 57

NPV = PV OF CASH FLOW – INITIAL OUTLAY = 168015.57 – 167000 = RM 1015.57

YEAR

CASH FLOW (RM)

PVIF 64%

PV (RM)

1

112720

0.6098

68736.66

2

112720

0.3718

41909.30

3

112720

0.2267

25553.62

4

112720

0.1382

15577.90

5

140720

0.0843

11862.70 ∑ PV = 163640.18

NPV = PV OF CASH FLOW – INITIAL OUTLAY = 163640.18 – 167000 = (RM 3359.82)

i) ii)

PERCENTAGE

NPV

62%

RM 1015.57

_______

RM 0.00

64%

(RM 3359.82)

RM 1015.57 – RM0.00 = RM 1015.57 RM 1015.57 – (RM 3359.82) = RM 4375.39 IRR = 62% + (1015.57 / 4375.39) x 2 = 62.4642%

(iv)

NET PRESENT VALUE (NPV) MACHINE TKC NPV = NACF 1-n (PVIFA 10%,5) + TCF (PVIF 10%,5) – INITIAL OUTLAYS = 74050 (3.7908) + 40000 (0.6209) – 225000 = 280708.74 + 24836 – 225000 = RM 80544.74

MACHINE RMR NPV = NACF 1-n (PVIFA 10%,5) + TCF (PVIF 10%,5) – INITIAL OUTLAYS = 112720 (3.7908) + 28000 (0.6209) – 167000 = 427298. 98 + 17385.2 – 167000 = RM 277684.18

(v)

Based on my answer in (i) and (ii), machine that I will choose is Machine RMR because it can recover initial outlays faster than Machine TKC and also it can reduce risks and increases liquidity. Machine RMR has positive and higher NPV than Machine TKC....