Question

Lecture 2 Case study A plastic packaging plant is assessing two investment projects. Only one pject can be chosen. Prepare the respective calculations to help the plant to make a decision The income statement for 2018 su the year is over is as follows: A . LTD Production overheads SGRA (selling general and administrative (1001 1001 Depreciation 200 (50) 150 (30) Net profit 120 2018 will be Year o for your model when investment is made). Assume no change in working capital during the year that means that you can use income statement as a proxy of operating cash flow statement Project 1: Investment: Printing machine, cost 300 thous. eura. The life of the machine is 8 years -The printing machine will help to increase current revenue by 10% in FY 2019 [Year 1 for your model). in 2020-2027 it the revenue will stay on the level of 2019. Labor costs will increase by 5% in FY 19 and then will stay on that level for 2020-2027 Additional maintenance cost (recorded within production overheads) will amount to 10 thous. Euro per each year of projection. The machine can be sold for 30 thous. Euro at the end of 2027 Project 2: Investment: Robot, cost 150 thous. Euro. The life of robot is 8 years. The robot does not increase revenue but helps to cut expenses. Labor costs will decrease by 15% in FY 19 and will stay on that level for 2020-2027. Additional maintenance expenses - 2 thous. Euro per year starting from Year 1. The robot can be sold for 15 thous. Euro at the end of 2027.

Please help

Answer 1

Solution:- NPV, XCR₂-R) IRR = Rit; " CNPV, - NPV) where R., R2= Randomly selected discount rates NPV is NPV at R. NP v₂ es NPV at Rz Immage 1 is cashflow without Project Image 2 is cashflow with Project A Image 3 is cashblow with Project B Image 4 is compcoision of all the three above Now, Prom image 4 we can see that IRR of incremental cash flows of project A is 26.77% which is highes than that of Project 8 12.777. So one should go for Projekt A. However following important things should be noted: 1. In such a scenario we can not calculate NPV as discount rate is not given. 2. NPV is a better tool as it helps us to know the net on discounted Casubloe. 8. Since discount rate or WACC (weighted average cost of capital is not given we can not define absolute return of the Projects.

labor SGA PBT Tax PAT Raw Material Cost Prod, Overheads Maintena Depreciation nce Salvage Value Cash flow Without Project NA Year Year Project Cost/ Revenue Count renovation 2018 2019 1,100,000 2020 1,100,000 2021 1,100,000 2022 1,100,000 2023 1,100,000 2024 1,100,000 2025 1,100,000 2026 1,100,000 2027 1,100,000 (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (200,000) (200,000) (200,000) (200,000) (200,000) (200,000) (200,000) (200,000) (200,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000 (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 120,000 170,000 170,000 170,000 170,000 170,000 170,000 170,000 170,000 170,000

Revenue material cost 1,100,000 500,000 200,000 100,000 Labour Production Overheads SGA Growth rates for 2019 Revenue growth rate Labour Maintaince Project B 100,000 Projetc A 10.00% 5.00% 10000.00 -15% 2,000 labor SGA Depreciation | PBT PAT Salvage Value Raw Material Cost Prod, Overheads Maintenance Cash flow With Project Year Year Project Revenue Count Cost/ 2018 0 (300,000) 20191 1,210,000 2020 1,210,000 2021 1,210,000 2022 1,210,000 20235 1,210,000 2024 1,210,000 2025 1,210,000 2026 1,210,000 2027 9 1,210,000 000 Vouw (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000)|_ (210,000) (210,000) (210,000) (210,000) (210,000)| (210,000) (210,000) (210,000)| (210,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 240,000 (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) 210,000 210,000 210,000 210,000 210,000 210,000 210,000 210,000 210,000 (300,000) 260,000 260,000 260,000 260,000 260,000 260,000 260,000 260,000 290,000 30,000

200,000 100,000 Labour Production Overheads SGA Growth rates for 2019 Revenue growth rate Labour Maintaince 100,000 Projetc B -15% 2,000 labor SGA Maintenance Depreciation PBT PAT Salvage Value Cash flow Raw Material Cost Prod, Overheads 2020 Year Year Project Revenue Count Cost/ 2018 01 (150,000) 2019 1 1,100,000 1,100,000 2021 3 1,100,000 2022 1,100,000 20235 1,100,000 2024 1,100,000 2025 1,100,000 2026 1,100,000 2027 1,100,000 (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (170,000) (170,000) (170,000) (170,000) (170,000) (170,000) (170,000) (170,000)| (170,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (2,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) (50,000) 178,000 178,000 178,000 178,000 178,000 178,000 178,000 178,000 178,000 (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) (30,000) 148,000 148,000 148,000 148,000 148,000 148,000 148,000 148,000 148,000 (150,000) 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 213,000 15,000

Year Year Count 0 3 2018 2019 2020 2021 2022 2023 2024 2025 2026 20271 Cash Cash Incremen Cash Incremen flow flow With tal Cash flow with tal Cash Without Project A Flow Project B Flow Project Project A Project B -300000 300000 -150000 -150000 1 170000 260000 90000 198000 28000 2 170000 260000 900001 198000 28000 170000 260000 90000 198000 28000 4 170000 260000 90000 198000 28000 5 170000 260000 90000 198000 28000 6 170000 260000 90000 198000 28000 7 170000 260000 90000 198000 28000 8 170000 260000 900001 198000 28000 9 170000 290000 120000 213000 43000 26.77% 12.77% IRR