MBA 6023 CORPORATE FINANCE

Case Study Analysis: 30%By A. HARIS AWANG (MBA2016-04-1001)

04th Dec, 2016

CASE 3 (10%) 04/12/16

The management of Matrix Stores Sdn. Bhd. are in the process of exploring the company’s investment opportunities.

There are six opportunities, the details and relevant information for which is as follows:

Project A would cost RM29 000 now, and would generate the following cash flows:

Year RM

1 8,000

2 12,000

3 10,000

4 6,000

The equipment included in the cost of the investment could be resold for RM5,000 at the start of year 5.

Project B would involve a current outlay of RM44,000 on capital equipment and RM20,000 on working capital.

The profits from the project would be as follows:

1

Year Sales Variable ContributionFixed cost Profit

Costs

RM RM RM RM RM

1 75,000 50,000 25,000 10,000 15,000

2 90,000 60,000 30,000 10,000 20,000

3 42,000 28,000 14,000 8,000 6,000

Fixed costs include an annual charge of RM4,000 for depreciation; all the other fixed costs are avoidable. At the end of year 3 the working capital investment would be recovered and the equipment would be sold for RM5,000.

Project C would involve a current outlay of RM50,000 on equipment and RM15,000 on working capital. The investment in working capital would be increased to RM21,000 at the end of the first year. Annual cash profits would be RM18,000 per annum for five years, at the end of which the investment in working capital would be recovered.

Project D is a long-term project involving an immediate outlay of RM32,000 and annual cash profits of RM4,500 per annum in perpetuity.

Project E is another long-term project, involving an immediate outlay of RM20,000 and annual cash profits as follows:

Year RM

1 - 5 5,000

6 - 10 4,000

11 in perpetuity 3,000

2

The company discounts all projects of ten years’ duration or less at a cost of capital of 12%, and all longer projects at a cost of 15%.

You are required to calculate the:

(a) NPV of each project, and determine which should be undertaken by the company. (20 marks)

PROJECT A (r = 12%)

Year Cash Flow (RM)

Cummulative CF (RM)

FactorPV (RM)

0 (29,000) (29,000) (29,000) 1 8,000 (21,000) 0.893 7,144 2 12,000 (9,000) 0.797 9,564 3 10,000 1,000 0.712 7,120 4 6,000 7,000 0.636 3,816 5 5,000 12,000 0.567 2,835

NPV = 1,479

Payback Period= 2 + (|-RM9,000| ÷ RM10,000)= 2 + (RM9,000 ÷ RM10,000)= 2 + 0.9= 2.9 years

PROJECT B (r = 12%)

Year Sales Variable Contribution Fixed cost Depreciation Equipment Sold

Recovered Profit Cummulative CF

FactorPV

Costs Working Cap(RM) (RM) (RM) (RM) (RM) (RM) (RM) (RM) (RM) (RM) (RM)

0 (64,000) (64,000) (64,000) 1 75,000 50,000 25,000 10,000 4,000 19,000 (45,000) 0.893 16,967 2 90,000 60,000 30,000 10,000 4,000 24,000 (21,000) 0.797 19,128 3 42,000 28,000 14,000 8,000 4,000 5,000 20,000 35,000 14,000 0.712 24,920

NPV = (2,985)

Payback Period= 2 + (|-RM21,000| ÷ RM35,000)= 2 + (RM21,000 ÷ RM35,000)= 2 + 0.6= 2.6 years

3

PROJECT C (r = 12%)

Year Cash Flow (RM)

Cummulative CF (RM)

FactorPV (RM)

0 (65,000) (65,000) (65,000) 1 12,000 (53,000) 0.893 10,716 2 18,000 (35,000) 0.797 14,346 3 18,000 (17,000) 0.712 12,816 4 18,000 1,000 0.636 11,448 5 39,000 40,000 0.567 22,113

NPV = 6,439

Payback Period= 3 + (|-RM17,000| ÷ RM18,000)= 3 + (RM17,000 ÷ RM18,000)= 3 + 0.94= 3.94 years

4

PROJECT D (r = 15%)PV for perpetuity = A/rA= Fixed periodic paymentsr = interest ratePeriodic payment of RM4,500 per year at r = 15%Amount of Perpetuity = RM4,500/0.15= RM30,000

Year Cash Flow (RM)

FactorPV (RM)

0 (32,000) (32,000) 1 30,000 0.870 26,100

NPV = (5,900)

Year Cash Flow (RM)

Cummulative CF (RM)

0 (32,000) (32,000) 1 4,500 (27,500) 2 4,500 (23,000) 3 4,500 (18,500) 4 4,500 (14,000) 5 4,500 (9,500) 6 4,500 (5,000) 7 4,500 (500) 8 4,500 4,000 9 4,500 8,500

10 4,500 13,000 11 ~ in Perpetuity 4,500 17,500

Payback Period= 7 + (|-RM500| ÷ RM4,500)= 7 + (RM500 ÷ RM4,500)= 7 + 0.11=7.11years

5

PROJECT E (r = 15%)

Year Cash Flow (RM)

Cummulative CF (RM)

FactorPV (RM)

0 (20,000) (20,000) (20,000) 1 5,000 (15,000) 0.870 4,350 2 5,000 (10,000) 0.756 3,780 3 5,000 (5,000) 0.658 3,290 4 5,000 - 0.572 2,860 5 5,000 5,000 0.497 2,485 6 4,000 9,000 0.432 1,728 7 4,000 13,000 0.376 1,504 8 4,000 17,000 0.327 1,308 9 4,000 21,000 0.284 1,136

10 4,000 25,000 0.247 988 11 3,000 28,000 0.215 645 12 3,000 31,000 0.187 561 13 3,000 34,000 0.163 489 14 3,000 37,000 0.141 423 15 3,000 40,000 0.123 369

NPV = 5,916

Payback Period= 4 years

Summary of Projects NPVProject NPV (RM)

A 1,479

B (2,985)

C 6,439

D (5,900)

E 5,916

6

Project C should be undertaken by the company since it has the highest NPV.

(b) Payback periods of project all 5 projects. (10 mark)

Summary of Projects Payback PeriodsProject Payback Period (Years)

A 2.90

B 2.60

C 3.94

D 7.11

E 4.00

[TOTAL: 30 MARKS]

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