what I need all in the word file
project_bus_4183.docx
Unformatted Attachment Preview
ADWC
BUS 4183-Corporate Finance
Case Study
Corporate Finance
Assessment 3 – Project
March 2017
Capital Budgeting – Case Study
Assume that as a financial management trainee at Ultra Tech Company – a computer service firm – you
are just facing the following tasks:
•
•
Analysis of the financial statements.
Analysis of capital investment projects
CEO of your company is considering investing in one of the four projects offered to your company. With
no background in financial theory, he is not sure which project should be selected. In addition, he is not
very much aware about the financial health of the company. He is confident about your analytical skills
and want you to analyze company’s financial statements and recommend the best project for the
investment.
During the meeting your CEO has provided you the financial statements and shared the details of the
following four projects, all of which are considered to be equally risky with 10% minimum acceptable
rate of return. The company uses a straight-line method for calculating depreciation and the company’s
tax rate is 33%.
Proposal –A:
This proposal is to buy machine. Machine is six years old and was considered a good buy at $400,000. In
return, the machine would bring the following revenue and operating costs. Salvage value is ignored.
Initial investment
Revenue
Operating costs
Depreciation Expense
YR-0
(400,000)
YR-1
YR-2
YR-3
YR-4
YR-5
44,000
11,250
60,000
78,000
12,000
60,000
112,300
12,500
60,000
225,000
13,000
60,000
168,750
14,000
60,000
1
ADWC
BUS 4183-Corporate Finance
Case Study
Proposal –B:
This proposal is to diversify into copy machines. The new business was expected to bring the following
revenue and operating costs; Salvage value is ignored
Initial investment
Revenue
Operating costs
Depreciation Expense
YR-0
(600,000)
YR-1
YR-2
YR-3
YR-4
YR-5
87,500
26,000
18000
175,000
27,000
18000
262,500
29,000
18000
393,750
30,000
18000
525,000
32,000
18000
Proposal—C:
This proposal is to buy a Jet. The Jet was expensive and, counting additional training and licensing
requirements. However, it would give the company access to a wider market as well. Salvage value is
ignored
Following are key financial figures:
Initial investment
Revenue
Operating costs
Depreciation Expense
YR-0
(800,000)
YR-1
YR-2
YR-3
YR-4
YR-5
200,000
60,000
140,000
300,000
85,000
140,000
400,000
95,000
140,000
450,000
98,000
140,000
500,000
105,000
140,000
Proposal – D:
This proposal is to begin operating a fleet of trucks. Ten trucks could be bought for only $61,000 each,
and the additional business would bring above $700,000 in new sales in the first two years alone.
Following are key financial figures: Salvage value is ignored
Initial investment
Revenue
Operating costs
Depreciation Expense
YR-0
(610,000)
YR-1
YR-2
YR-3
YR-4
YR-5
382,500
31,000
102,000
325,125
31,000
102,000
89,250
31,000
102,000
76,500
31,000
102,000
51,000
31,000
102,000
CEO has particularly discussed his worries/ concerns of the recent economic conditions and his
speculation is that operating cost might increase by 10% than expected and revenue might decrease by
5% than the expected!
2
ADWC
BUS 4183-Corporate Finance
Case Study
You are planning to use payback, internal rate of return, and net present value evaluation methods.
You are facing one constraint that there is no outside financing be used this year. CEO is against a stock
issue for fear of diluting earnings and his control over the firm. As a result, the size of the capital budget
this year is limited to $800,000, which meant that only one of the four projects under consideration
could be chosen. You are not too happy about the situation but you have to concentrate on selecting
the best of the four.
Do not forget that selection of the project also depends upon the sensible financial analysis of the last
two years’ financial statements of the company. You can convince your boss with sound financial
analysis and sensible arguments!
Ultra Tech Company
Income Statements for the year ended Dec 31, 2016
(All in ‘000)
2015
Sales
$
7650
Less: Cost of sales
5800
Gross profit
1850
Less: Selling and Admin. Expenses
100
Less: Lease Payments
50
EBIT
1700
Less: Interest
50
EBT
1650
Less: Taxes
600
EAT (Net Income)
1050
Dividends paid
300
Transferred to retained earning
750
2016
$
11500
9430
2070
120
50
1900
350
1550
550
1000
300
700
Balance Sheets as at Dec 31, 2016
ASSETS
Current Assets
Cash
A/Receivable
Inventory
Total Current assets
Fixed Assets
Total assets
LIABILITIES
Current Liabilities
$
900
1200
1500
$
3600
10050
13650
3
$
50
3800
2450
$
6300
11350
17650
ADWC
A/Payable
Tax payables
Total Current Liabilities
Long term Debt
Total Liabilities
SHAREHOLDERS’ EQUITY
Common Stock, $10 par
Retained Earnings
Total Shareholders’ Equity
Total Liabilities. & Shareholder’s
Equity
BUS 4183-Corporate Finance
1800
600
Case Study
2150
550
2400
350
2750
5900
5000
2700
3350
6050
5900
5700
10900
13650
11600
17650
Requirements:
This is an individual project.
Part A: Analyze the financial statements of Ultra Tech Company for both years and comment in detail
over the financial health of the company during year 2016 under four areas: (25 points)
– Liquidity (2 ratios)
– Asset Utilization (3 ratios)
– Debt Utilization (2 ratios)
– Profitability (3 ratios)
Note: A detailed analysis is expected in each of these four areas with suggestions for improvement.
Part B: (Use a different MS Excel worksheet for each of these proposals) (25 points)
1. Calculate the cash flows for each of the proposals.
2. Calculate the following for each of the proposals in the case
a. Payback period (PBP)
b. Net Present value (NPV)
c. Internal rate of return (IRR)
Part C: Consider drawing up a scenario analysis for the winning project. (25 points)
1. Consider 2 alternative scenarios (e.g. what would happen if operating cost were 10% higher and
revenue is 5% lower than the expected? And what will happen if revenues are 5% higher?)
2. Calculate a weighted average NPV and check whether your decision will change? If yes – Why?
Part D: Write a report to your CEO about the financial health of the company and your
recommendations. (25 points)
1. Your report should include your complete financial analysis
2. Recommendation as to which proposal should be adopted (A, B, C or D), further
recommendations after the scenario analysis and the reasons for your recommendation in order
to address his concerns and convince him of your choice.
4
ADWC
BUS 4183-Corporate Finance
SUBMISSION REQUIREMENTS
3. You will submit the following:
a. The Excel spreadsheet – complete with calculations
b. Report to the CEO incl. Financial Statements Analysis and Recommendations.
5
Case Study
…
Purchase answer to see full
attachment
Recent Comments