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    1) The document outlines disagreements with assumptions in a company's expansion plan, questioning whether sales volumes, price increases, labor costs, and expenses can be accurately projected given competitive market conditions. 2) It states the weighted average cost of capital (WACC) of 9.64% should be used to discount cash flows since it reflects the company's risk. 3) It shows the net present value of the cash flows is positive at $2,755.02, so the company can proceed with the decision.

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    Hansson

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    1) The document outlines disagreements with assumptions in a company's expansion plan, questioning whether sales volumes, price increases, labor costs, and expenses can be accurately projected given competitive market conditions. 2) It states the weighted average cost of capital (WACC) of 9.64% should be used to discount cash flows since it reflects the company's risk. 3) It shows the net present value of the cash flows is positive at $2,755.02, so the company can proceed with the decision.

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    1) The document outlines disagreements with assumptions in a company's expansion plan, questioning whether sales volumes, price increases, labor costs, and expenses can be accurately projected given competitive market conditions. 2) It states the weighted average cost of capital (WACC) of 9.64% should be used to discount cash flows since it reflects the company's risk. 3) It shows the net present value of the cash flows is positive at $2,755.02, so the company can proceed with the decision.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    23 views11 pages

    Hansson

    Uploaded by

    Just Some Edits
    1) The document outlines disagreements with assumptions in a company's expansion plan, questioning whether sales volumes, price increases, labor costs, and expenses can be accurately projected given competitive market conditions. 2) It states the weighted average cost of capital (WACC) of 9.64% should be used to discount cash flows since it reflects the company's risk. 3) It shows the net present value of the cash flows is positive at $2,755.02, so the company can proceed with the decision.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 11

    Question 1

    Following are the points with which I disagree


    1) Whether the company sell the products they are manufacturing by increasing capacity. As the
    market is already matured and unit volume barely growing at less than 1% , the projected increase in
    sales volume is difficult to achieve.
    2) Since the market is very competitive, the assumption of a constant price increase @1% may also not
    work, especially if company wants to push extra volume into market.
    3) Salaried labour cost has a disproportionate increase with the revenue, becoming almost triple of
    2009 values , where revenue didnot even doubled. This assumption is also questionable.
    4) Constant S&D expenses also may not work. We may need to spend more on them to sell the
    increased volumes in a competitive market.

    Question 2

    WACC of 9.64% should be used which is the cost of raising new funds at the existing risk profile of the company. WACC should
    flows or Hurdle rate because it is the minimum rate of return that should be obtained in any investment.

    Question 3
    Since the NPV of the cash flows is positive, the company can go ahead with the decision.
    Particulars Amount
    Present Value of cash flows 47,755.02
    Present Value of Cash Outflows 45,000.00
    NPV 2,755.02
    company. WACC should be used to discount the cash
    nt.
    Particulars 2009 2010 2011 2012 2013 2014 2015 2016
    Revenue 84960 93881 103124 112700 122618 132887 135545 138256
    Growth % 10.50% 9.85% 9.29% 8.80% 8.37% 2.00% 2.00%

    Units 48000 52000 56000 60000 64000 68000 68000 68000


    Production Cost PU 0.94 0.95 0.96 0.97 0.98 0.99 1 1.01
    Production Cost 45120 49400 53760 58200 62720 67320 68000 68680
    M oh 3600 3708 3819 3934 4052 4173 4299 4428
    M expense 2250 2318 2387 2459 2532 2608 2687 2767

    Gross Profit 33990 38455 43158 48107 53314 58786 60559 62381
    Margin 40.01% 40.96% 41.85% 42.69% 43.48% 44.24% 44.68% 45.12%

    Salaries 640 662.4 1028.4 1064.4 1468.8 1520.2 1573.4 1628.5


    Labour Wages 18640 20233.3 22842.4 25254.6 28174.8 30888.5 31969.6 33088.5

    SGA Expenses % 7.80% 7.80% 7.80% 7.80% 7.80% 7.80% 7.80% 7.80%
    SGA Expenses 6626.88 7322.718 8043.672 8790.6 9564.204 10365.186 10572.51 10783.968

    EBITDA 8083.12 10236.58 11243.53 12997.4 14106.196 16012.114 16443.49 16880.032


    EBITDA % 9.51% 10.90% 10.90% 11.53% 11.50% 12.05% 12.13% 12.21%

    Depreciation 4006.2 4006.2 4006.2 4006.2 4006.2 4006.2 4006.2 4006.2


    EBIT 4076.92 6230.382 7237.328 8991.2 10099.996 12005.914 12437.29 12873.832
    Interest 7.7795 7.7795 7.7795 7.7795 7.7795 7.7795 7.7795 7.7795
    PBT 4,069.14 6,222.60 7,229.55 8,983.42 10,092.22 11,998.13 12,429.51 12,866.05
    TAX @ 40% 1,627.66 2,489.04 2,891.82 3,593.37 4,036.89 4,799.25 4,971.80 5,146.42

    PAT 2,441.48 3,733.56 4,337.73 5,390.05 6,055.33 7,198.88 7,457.71 7,719.63


    2017 2018
    141021 143841
    2.00% 2.00%

    68000 68000
    1.02 1.03
    69360 70040
    4560 4697
    2850 2936

    64251 66168
    45.56% 46.00%

    1685.5 1744.5
    34246.6 35445.2

    7.80% 7.80%
    10999.638 11219.598

    17319.262 17758.702
    12.28% 12.35%

    4006.2 506.2
    13313.062 17252.502
    7.7795 7.7795
    13,305.28 17,244.72
    5,322.11 6,897.89

    7,983.17 10,346.83
    Particulars 2008 2009 2010 2011 2012 2013
    Opening balance 204.4 41198.2 37199 33199.8 29200.6 25201.4
    Add: Additions 45000 7 7 7 7 7
    Less: Sold During the Year 0 0
    Closing Balance 45204.4 41205.2 37206 33206.8 29207.6 25208.4

    Depreciation
    On existing assets 6.2 6.2 6.2 6.2 6.2 6.2
    on new assets 4000 4000 4000 4000 4000 4000
    Total Dep 4006.2 4006.2 4006.2 4006.2 4006.2 4006.2

    WDV 41198.2 37199 33199.8 29200.6 25201.4 21202.2

    Particulars Loan Amount Int expense


    Existing Debt 49.8 3.3
    New debt 57.8 4.4795
    Total 107.6 7.7795
    2014 2015 2016 2017 2018
    21202.2 17203 13203.8 9204.6 5205.4
    7 7 7 7 7

    21209.2 17210 13210.8 9211.6 5212.4

    6.2 6.2 6.2 6.2 6.2


    4000 4000 4000 4000 500
    4006.2 4006.2 4006.2 4006.2 506.2

    17203 13203.8 9204.6 5205.4 4706.2


    WACC 9.34%
    1 2 3 4 5
    Particulars 2009 2010 2011 2012 2013
    EBITDA 8,083.12 10,236.58 11,243.53 12,997.40 14,106.20
    Less: Taxes 1,627.66 2,489.04 2,891.82 3,593.37 4,036.89
    NOPAT 6,455.46 7,747.54 8,351.71 9,404.03 10,069.31

    Less: increase WC 12,817.00 1,221.64 1,265.01 1,309.86 1,355.87


    Less: Capex 7 7 7 7 7
    WC realisation
    Free cash Flows -6,368.54 6,518.90 7,079.70 8,087.17 8,706.44

    Discount Factor 0.91453773 0.836379259 0.764900388 0.699530264 0.6397468


    DCF -5,824.27 5,452.27 5,415.27 5,657.22 5,569.92
    Present Value of cash flows 47,755.02
    Present Value of Cash Outflows 45,000.00
    NPV 2,755.02
    6 7 8 9 10
    2014 2015 2016 2017 2018
    16,012.11 16,443.49 16,880.03 17,319.26 17,758.70
    4,799.25 4,971.80 5,146.42 5,322.11 6,897.89
    11,212.86 11,471.69 11,733.61 11,997.15 10,860.81

    1,403.09 359.81 366.85 374.05 381.40


    7 7 7 7 7
    11,640.04
    9,802.77 11,104.88 11,359.76 11,616.10 22,112.46

    0.5850726 0.535071 0.4893426 0.4475223 0.409276


    5,735.33 5,941.90 5,558.81 5,198.46 9,050.10
    Particulars 2009 2010 2011 2012 2013
    Revenue 84,960.00 93,881.00 103,124.00 112,700.00 122,618.00
    COGS 50,970.00 55,426.00 59,966.00 64,593.00 69,304.00

    Debtors days 47.6


    Inventory Days 37.6
    Creditors Days 34.2

    Debtors 11,233.60 12,413.15 13,635.28 14,901.44 16,212.82


    Inventory 5,323.53 5,788.94 6,263.12 6,746.38 7,238.42
    Creditors 4,842.15 5,265.47 5,696.77 6,136.34 6,583.88

    Working Capital 10250 11,714.98 12,936.62 14,201.63 15,511.49 16,867.36


    Increse in NWC 1,464.98 1,221.64 1,265.01 1,309.86 1,355.87
    2014 2015 2016 2017 2018
    132,887.00 135,545.00 138,256.00 141,021.00 143,841.00
    74,101.00 74,986.00 75,875.00 76,770.00 77,673.00

    17,570.61 17,922.06 18,280.52 18,646.11 19,018.98


    7,739.44 7,831.87 7,924.72 8,018.20 8,112.51
    7,039.60 7,123.67 7,208.13 7,293.15 7,378.94

    18,270.46 18,630.26 18,997.11 19,371.16 19,752.56


    1,403.09 359.81 366.85 374.05 381.40
    Kd Wd Ke We tax WACC
    7.75% 20.90% 10.59% 79.10% 40% 9.34%

    Cost of Equity 10.59%


    Rf 3.75%
    Market Risk Premium 5%
    Beta 1.37

    BETA- Equity 1.37


    Asset beta 1.18
    Debt/Value 20.90%
    D/E 0.26
    Tax rate 40%

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