Financial modelling techniques
* Learn to develop income statement and cash flow statement.
* Understand the concept of time value of money, the present & future value.
* Understand what is cost of capital to a company.
* What is payback period for an investment?
* How to compute NPV & IRR?
* What are the decision criteria of NPV & IRR?
* How to apply them in decision making?
* Case studies.
1. Dwyer Company plans to develop a new product. Sales manager believes that the firm could sell 5000 units per year at $14 each for 5 years. Production manager has determined that machinery costing $60000 and having a 5-year life with ...view middle of the document...
Which machine should Walton buy?
4. SDSU Enterprise wishes to select the best of the three possible machines – each expected to fulfill the need for additional extrusion capacity. The three machines – A, B and C are equally risky. The firm plans to use a 12% cost of capital to evaluate each of them. The initial investment and annual cash inflows over the life of each machine are given in the table below:
A B C
Initial investment 92,000 65,000 100,500
Year 1 12,000 10,000 30,000
2 12,000 20,000 30,000
3 12,000 30,000 30,000
4 12,000 40,000 30,000
5 12,000 30,000
Which machine will you recommend to buy?
5. Raven Publisher is bringing out a new text book. Raven expects volume over the 3-year life of the first edition to be 25000, 18000 and 13000 books, respectively. The book will be sold for $12 at retail, of which Raven gets 75%. Variable costs associated with each book are:
Paper and cover 1.50
Royalties to author 1.40
Others (printing, etc) 1.10
Fixed cost directly associated with the book will be $20000 annually. It costs about $75000 to set up. Special advertising and promotion cost of $8000 will be incurred immediately upon signing contract, and approximately 12000 will be spent at the end of the first year and the second year to advertise the book.
Company tax rate if 40%, with 16% cost of capital.
Should the book be published?
Marketing expects sales will be higher by 10% if book is more expensively produced. VC is $4.50 and set up cost is $85,000. Should it be published?
6. ABC is a 3PL company. There is a potential new customer who is considering to engage ABC’s service. The outsourced services include storage, handling, order fulfilment, local deliveries and inventory record keeping. Their requirement and estimated workload per month are as follows:
Storage: average 600 pallet space per month
Movement: 200 pallets/In & 300 pallets/Out per month
Orders: average 1000 orders per month for outgoing and average 500 orders for incoming.
SKU: average 5 SKUs per order
Deliveries: average 500 trips per month
(Existing fleet is capable of handling this additional volume)
Additional capital investment to handle this customer is $45,000 to be depreciated over the contract duration of five years. The Finance has allocated another depreciation expense of $1200 annually for this project. The monthly salary including benefits of the additional staff needed to manage this project is $25,000.
ABC plans to invoice the customer $10/pallet for storage each month and $7 for handling each pallet (in and out). For record keeping (data entry), they plan to bill the customer $0.40 for each SKU. Local delivery will be charged at $30 each trip.
The company is at 16% tax bracket with 10% cost of capital. Should the company proceed to make the offer to the customer?
If ABC plans to achieve a 30% after tax return for this...