After the calculation of both the annual savings and the cost of manufacturing PCBs in house, the difference between these two values generated a value known as the net savings before tax. The year 2005 and 2007 are showing negative values while the other three years are showing positive values. The next step is the inclusion of the Architectural & Engineering and Furnishing cost which are equal to the total of $336,000.

The next step is the calculation of tax expense / savings. The current tax rate is 36%, which has been provided by the case. The amount of tax is calculated by taking the product of the net savings before and tax rate.

Another step is the calculation of the net savings after tax. For this purpose, the difference between net savings and tax expense / saving is taken as the net saving after tax.

Moreover, it is known that the amount of all depreciation related to the following capital expenditure has been included in the fixed cost of every year. The depreciation is a non-cash item as it has no impact upon the cash flows of the company. The amount of depreciation has been calculated in the given EXHIBIT (excel file). The method of depreciation, which is used in the calculation, is on a straight line basis. The cost of each capital expenditure has been divided from its respective life to arrive at the annual depreciation. The building has a life of 30 years, 7 years in case of capital equipment, and 3 years for the equipment related to communication and IT.

After calculating the annual depreciation for each of the respective capital expenditure, their total has been taken in the NPV analysis and has been added back to the net saving after tax. The amount which is generated by adding back the depreciation is known as the “Net Cash flow (unadjusted). It is un adjusted in a sense that the working capital adjustment is the net increase and decrease in its current assets and liabilities as compared to the previous year.

The working for the calculation of the changes in the working capital is shown in the EXHIBIT (excel file). As there is no information provided in the given case regarding the current assets, this further includes the amount of receivable, inventory, cash,etc. It is not possible to calculate the working capital amount appropriately. Therefore, for this reason it is assumed that the changes in the incremental accounts payable are the changes in the amount of the net working capital. The information regarding this prospect has been taken from the case Exhibit no. 3.

The incremental accounts payable are calculated by taking the difference between the values of the payable under old strategy and payable under the new policy. The difference between this has been shown as “Changes in A/P, new vs old”,which is further taken to the NPV calculation as changes in the working capital. It is noted that the amount of accounts payable is increasing which means it is being considered as a source of cash.Thus, it is adjusted from the amount net cash flows after tax (unadjusted) by adding it. The adjusted amount is denoted as the “Net Cash flows after adjustments”.

It is assumed that the project will continue to yield the following streams of cash flows as generated at the end of year 2009 for the foreseeable future. Therefore, this assumption leads to the calculation of the terminal value at the end of year 2009. The terminal value is calculated by using the hurdle rate, which is equal to 15%. It is also assumed that the growth is 0% as the data is insufficient to calculate the appropriate growth rate. The terminal value is calculated by dividing the 2009 year end cash flow from the hurdle rate, which is equal to around $62 million in the given case.

After all these steps, the NPV of the project is calculated by using the hurdle rate 15% as a discount rate for this project. The project yields an NPV of around $24.7 million positive. This seems to be a positive point for the company if the qualitative analysis, which will be discussed later, is also showing positive aspects. The positive NPV shows that the return from the investment is positive.

After the calculation of NPV, the next step is to calculate the IRR of the project. The IRR shows the rate at which the NPV of the project will become zero. Further clarification is provided from the calculation of IRR. The IRR is calculated by using the formula of IRR on the excel spreadsheet and shown under the calculation of the NPV, which yields a rate of 59% which is quite bigger from the normal. This means that if the discount rate of the company is 59%, then the NPV of the project will become zero and such a big value as a discount rate of 59% is impossible to get as because even the extreme risky projects demand a maximum of 15% to 20% hurdle rate. Therefore, from these prospects, the risk position of the company is quite stable.

The last step in the quantitative analysis is the calculation of the payback period of the project and is also shown in the EXHIBIT (excel file). The payback period shows that in how much time the company will be able to recover his whole investment. The calculation shows that the payback period for this project is 4.78 years, which is lower than 5 years. This is a positive point for the company as it is able to recover its amount before the time and due to which the NPV of the project is also positive……………….

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution

Share This