Panasonic Manufacturing Malaysia Berhad is engaged in the industry and sale of electrical place contraptions, batteries and related constituents. The Company chiefly operates in Malaysia, Japan, Asia/Middle East and others. The Company holds a 40 % equity involvement in its associated company, Panasonic Malaysia Sdn. Bhd, a company incorporated in Malaysia. The chief activities of the associated company consist of the gross revenues of consumer electronic merchandises, place contraptions, batteries, office mechanization, undertaking systems and room air-conditioners under the trade name name, Panasonic.
In the late 2011, the production in Panasonic works in Thailand was suspended due to deluge catastrophe experienced. Minimizing the hazard, the board member reassigning 40 % of production line from Panasonic Manufacturing Co. Ltd ( Thailand ) to Panasonic Manufacturing Malaysia Sdn. Bhd. Production of certain constituent will be shifted to Malaysia. Due to increasing of production capacity, Panasonic Manufacturing Malaysia Sdn. Bhd urged to put a set of machine for production.
Introduction
Natural catastrophe is one of unpredictable factors which affect company benefit and even company ‘s sustainability. Most of natural catastrophes contributed some intervention in production lines of merchandises in a works, for case inundation that often occur in Thailand. It is making some jobs that drive the companies which located in the afloat country into immense losingss in every facets of concern. Panasonic Corporation is one of the companies which have suffered from this natural catastrophe. The issue and the fact that inundation is the dominant jeopardy in Thailand, with 1.5 events per twelvemonth is being concerned as serious issue to be addressed shortly by Panasonic Corporation as parent company in order to minimise the Panasonic planetary loss in the hereafter. It is accordingly will allow Panasonic keep its leading in electronics merchandises.
The Board Directors come up with the thought which is reassigning the 40 % production capacity from Panasonic Manufacturing ( Thailand ) Co. , Ltd to Panasonic Manufacturing Malaysia Bhd. This new scheme is aimed to minimise the hazard of the company from the future natural catastrophe, because Malaysia is comparatively low hazard in term of natural catastrophe if compared to Thailand. Some harm on production machines and equipments in Panasonic Manufacturing ( Thailand ) Co. , Ltd – as the consequence of inundation, authorities ‘s supporting, state ‘s good substructure and first-class quality of its human resource may act upon the determination of taking Panasonic Manufacturing Malaysia Bhd. by Panasonic Board Directors.
Extra production capacity in Panasonic Manufacturing Malaysia Bhd. will take the several direction and the Board of Directors into no option except buying new machines and equipments which accordingly bare the company ‘s capital. Therefore, some units be aftering are established to gauge the investing ‘s demands and hazards in order to ease the board managers to bring forth a low-risk determination.
Company BACKROUND
In the late 1920s Matsushita Electrical Industrial Co. Ltd. was founded by Konosuke Matsushita, nowadays its called Panasonic. Panasonic is a Nipponese flag transnational electronics corporation headquartered in Kadoma, Osaka Japan. Panasonic has grown as elephantine electronic corporation alongside Sony, Toshiba and Canon. In add-on electronic, Panasonic offer non-electronic merchandises and services every bit good, such as place redevelopment and building technology. Panasonic is the universe ‘s 5th largest telecasting maker and semiconducting material seller.
The well-known recognized trade name Panasonic has a long narrative behind the popular family name and the scope of extended consumer durable goodss that carry its label stands its maker, the foundation of the trade name ‘s success, Panasonic Manufacturing Malaysia Berhad – PMMA. In Malaysia Panasonic has a long-standing presence for more than 30 old ages since it was established in 1976.
Through out the old ages Panasonic has observed a Swift or advancement from its low start as a manufacturer of dry cell battery to Malaysian giant maker taking in electronic contraptions.
Soon, Panasonic trade name name has emerged as one of the most welcome and sure trade name name for electrical and place contraption chosen by most Malayan families. At Panasonic, it industry, operate and present maintain a series of merchandise scope with globally competitory theoretical accounts under the Panasonic trade name name to the market, integrating new characteristics, enhanced capableness and improved quality, and every bit of import, with our first-class after-sales-services.
Panasonic Malaysia Manufacturing Berhad-PMMA, was listed in KLSE on 14 December 1966. Nowadays Panasonic Malaysia Manufacturing Berhad holding RM 60,7 million paid up capital and RM 701 million turnover, and 1030 figure of employee. And the company mission to lend Malayan growing “ We dedicated ourselves to the development of the state and to the development of our industry. In our enterprises, we hope to better the quality of life around us. Profit entirely will non be our chief end: we will besides seek for ways to profit society ” ( PMMA Annual Report, 2011 )
For the 2nd back-to-back twelvemonth, the Company achieved double-digit growing in its gross and for the fiscal twelvemonth ended 31 March 2011, the Company achieved gross of RM761.4 million an addition of RM81.6 million from the old fiscal twelvemonth ‘s gross of RM679.8 million.
The higher gross stemmed chiefly from the higher export gross revenues to the Middle East part and the full impact on the transportation of industry and gross revenues of certain nutrient processor and drinker theoretical accounts from Japan to Malaysia in the fiscal twelvemonth under reappraisal.
The leading gross revenues public presentation coupled with the execution of cost decrease steps, improved operational efficiencies, higher involvement income and foreign exchange addition enabled the Company to accomplish a singular combined net income before revenue enhancement of RM101.8 million for the twelvemonth ended 31 March 2011. This represents an admirable addition of 28 % or RM22.5 million against the old twelvemonth ‘s combined net income before revenue enhancement of RM79.3 million. The Company ‘s portion of its associated company ‘s post-tax net income was RM8.4 million ( 2010: RM 6.8 million )
Panasonic Malaysia Sdn Bhd posted amalgamate gross of RM1.7 billion for the fiscal twelvemonth ended 31 March 2011 ; an betterment of 7.3 % compared with the old fiscal twelvemonth. The pre-tax and post-tax net incomes from its group operations were RM30.4 million ( 2010: RM23.0 million ) and RM21.1 million ( 2010: RM17.0 million ) severally
With the pronounced betterment in public presentation, the Board of Directors is pleased to urge a concluding dividend of 35 cent per portion and a particular dividend of 95 cent per ordinary portion, less 25 % income revenue enhancement. This brings a entire dividend of 145 cent ( 2010: 120 cent ) per portion for the fiscal twelvemonth ended 31 March 2011. This sum represents an addition of 20.8 % from the last fiscal twelvemonth.
The Board believes that the systematically high dividend payment twelvemonth after twelvemonth has garnered much involvement amongst the investing community on the portions of the Company. The portion monetary value of the Company has been lifting steadily during the fiscal twelvemonth under reappraisal shutting at RM21.50 on 31 March 2011. This rise in portion monetary value gives an impressive capital grasp to medium and long-run investors.
Panasonic had unrelentingly attained a series of fabricating invention accomplishments and productiveness betterments, amongst others:
Re-layout of assembly lines to increase production capacity for higher gross revenues demand.
Enhancement of assorted procedures to better the end product capacity and to cut down CO2 emanation.
Invention of mould plating engineering which resulted in lower care cost and better quality.
Review of in-house plastic parts injection rhythm clip which resulted in large nest eggs.
Application of new engineering on top of the bing know-how.
Besides fabrication invention, the Company besides focused on merchandise invention on new characteristics, capableness and quality. In this context, the applied scientists from the Company ‘s Product Development and Engineering Department had managed to develop 179 new theoretical accounts of assorted merchandises this twelvemonth.
In order to better further in merchandise development, merchandise designs and degree of client satisfaction, the employees had visited the Panasonic client service subdivisions and service centres to listen to the voice of clients straight. This coaction had brought a batch of common benefits to all concerns, and enabled the squads to develop and present more competitory merchandises via client feedback.
As a responsible maker, the Company undergoes regular audit to guarantee assorted quality criterions are adhered to. In the twelvemonth under reappraisal, the hearers from Panasonic Corporation, Japan Headquarter carried out rigorous audit on the Company ‘s proficient and quality system to guarantee that it is in line with the Quality Policy of Japan Headquarters and we are pleased to inform that they were satisfied with the Company ‘s quality systems.
In recognizing that the sustainability and prosperity of the Company is extremely dependent on its employees, the Company introduced a new assessment system with bipartisan communicating, flexible working hours and offered particular inducement for employees who get cognition in adjustment, completing and injection accomplishments, Appropriate actions were besides taken to turn to concerns raised by employees via the Employee Opinion Survey. The Company will go on to keep optimal verve of the full administration by placing high possible staff and supply equal development for them to presume higher place.
Issue
Thailand has experienced its worst implosion therapy in old ages over the last few months in 2011, go forthing more than 420 people dead and doing terrible harm across northern and cardinal parts of the state. The inundations have badly damaged and disrupted fabrication operations in Thailand. Flooding has forced at least seven immense industrial estates in cardinal parts to shut, motivating the Federation of Thai Industries ( FTI ) to warn that harm to the industrial sector will be in the one million millions of dollars. It is interesting to observe that none of the industrial workss in Thailand have been flooded in the past 40 old ages or so. The last major inundation occurred in 1995, but the butchs in the industrial Parkss kept floodwaters out on that juncture. During this twelvemonth ‘s implosion therapy, heavy machinery was reportedly non brought in to raise the tallness of butchs for fright of damaging them. Alternatively sandbags were used, which finally gave manner to the floodwaters. As the inundations have badly impacted makers in cardinal Thailand, insured losingss from the event are expected to be important.
Damage and break to the fabrication sector has been monolithic after defense mechanisms protecting several industrial estates were breached. The Labour Ministry said that more than 14,000 concerns countrywide have had to shut because of the inundations. Factories in the states of Ayutthaya and Pathum Thani were peculiarly severely hit. Reports said around 1,300 mills across cardinal Thailand have been affected by the inundations, interrupting fabricating supply ironss inside and outside of Thailand. Many of these industrial estates house both local and international mills and concerns, with big Numberss doing electronic constituents and auto parts.
The production of electronics has been suspended as 100s of mills are under H2O. Break to provide ironss has besides halted operations, raising frights that the implosion therapy may hold a knock on affect on planetary fabrication. Indeed, functionaries expect break to operations to last several months and are warning the inundations could hold a similar impact on production as the Tohoku temblor in March. Thailand plays a critical function in the planetary supply concatenation and companies are hence seeking alternate production installations or supply paths for parts.
Five industrial estates ( Bang-Pa-in, Hi-Tech, Factory Land, Rojana and Saha Rattana Nakorn ) in the severely affected state of Ayutthaya ( Panasonic ) have been flooded. At Hi-Tech, studies said all 130 mills have been inundated by floodwaters of up to 3.4 metres deep. The Nava Nakorn industrial estate in Pathum Thani Province, one of Thailand ‘s oldest and largest industrial estates with a high concentration of Nipponese makers, has besides been evacuated after floodwaters submerged several mills
Officials at the Hi-Tech Industrial Estate said they were taking to restart operations by mid-December if the floodwaters recede in early November. They added that it will take up to 10 hebdomads to run out off 12 million three-dimensional metres of H2O in their installation. Officials at Nava Nakorn works, meanwhile, said it will take 90 yearss to clean up after the H2O has receded and about one twelvemonth to to the full reconstruct its substructure. Several electronics houses such as Panasonic have besides suspended end product at mills in Thailand because of the inundation harm. Other companies have been affected by supply deficits.
Panasonic is the biggest manufacturer of digital cameras, audio-visual merchandises and place contraptions in Thailand, where it has been in operation for 50A old ages. The company has ruled out relocating any of its production to another state. Hirotaka Murakami, the CEO of Panasonic Group in Thailand, ever manages to smile when he ‘s speaking about concern. But his smiling face, he confesses, hides a sad bosom because the local operations of the Nipponese company have faced a terrible impact from deluging.
Panasonic operates 12 mills in Thailand. At one flooded works in Rojana Industrial Park and two in Nava Nakorn, production is wholly halted. The break has forced some of its other workss it has two in Chachoengsao and seven in Samut Prakan to scale back their production because of deficits of constituents and supply of natural stuffs. Mr Murakami says it ‘s excessively early to gauge the full amendss, both from the implosion therapy and subsequent inability to present goods as promised, as the inundation is expected to spread out farther. However, he admits amendss would be huge if the inundations affect operations in Chachoengsao and Samut Prakan, where every bit much as 80 % of the end product is for export.
The group expects gross revenues in the 3rd one-fourth of its 2011 financial twelvemonth that ends following March 31 will decidedly be affected, but gross revenues are likely to retrieve in the 4th one-fourth, as disbursement on consumer goods and electrical contraptions is expected to detonate after inundation. Panasonic ‘s exports, chiefly to Europe, Japan, the United States and Asia, are presently handled individually by its mills.
As the inundation menace still exists, Mr. Murakami confirms the program about mill resettlement to another state. Production of certain parts for Panasonic will be shifted to Malaysia. To implement this scheme and due to natural catastrophe that often happen in Thailand, particularly flood, Panasonic Corporation plans to cut down production capacity in term consolidate the production in Malaysia under Panasonic Manufacturing Malaysia Berhad. He and his squad eventually reevaluate the state of affairs and put a new mill to increase the production to run into the current demand in the approaching months.
At the terminal of June 2011, Mr. Naoya Nishiwaki the Managing Director of the Panasonic Manufacturing Malaysia Berhad since may 2007 and graduated from Bachelor Degree in Industrial Engineering from Osaka Prefectural University in March 1981 was instructed by Mr, Murakami to back up the reassigning the works production at Malaysia by increasing the current machine capacity by sing besides non merely a short term but long term capacity determination should be do. Consideration of join forcesing and back uping attempt to back up the operation for Panasonic Group in Thailand until they recovered once more.
After taken encountered of the present machines capacity in Malaysia, farther more on the consideration of the preventative care and workers are taken into history. The effectual capacity shows that Panasonic group of Thailand are non in a equipt status to back up the Panasonic Manufacturing Malaysia Berhad during the Reconstruction period. However, Mr. Naoya Nishiwaki has come out with two options in order to being assessed two machinery investing proposals that needed instantly. In malice of that, sing besides on run intoing deadline of completion of puting up to purchase the machine capacity within one month period. This is chiefly due to the Reconstruction activities which might take approximately nine to twelve month. at the By making so, the merchandise will hold better quality and run into the production clip to carry through the demand.
A set of machine are needed to execute family contraption production line that consist of several production procedures. It is started from constituents production for all constituents excluded electric motor and fan blade until merchandise assembly. Both providers propose similar production lines and machines which somewhat different in specification. The highlighted differences are that Wenling City Hongyu Conveying Machinery Equipments Co. , Ltd. ( WCHCME CO. , LTD. ) proposes an automatic injection plastic casting machine while Dongguan Weichuang Dongyang Automation Equipment Co. , Ltd. ( DWDAE Co. , Ltd. ) in semi-automatic and country required put ining the machines and equipments, where WCHCME Co. , Ltd. proposes 2 hectares and DWDAE Co. , Ltd. proposes 2.3 hectares.
DWDAE Co. , Ltd. production machine investing cost is comparatively inexpensive when compared to the production machine WCHCME Co. , Ltd. The purchasing monetary value of the Machine DWDAE Co. , Ltd. is MYR 40,000 with the cost of installing of machinery is MYR 10,000. Meanwhile the buying monetary value of Machine WCHCME Co. , Ltd. is MYR 55,000 with installing of machinery is 12,000. The age economical both machines are 5 old ages. Due, to the determination in which the machine will sell in the hereafter, analysis the residuary value engine in twelvemonth 4 twelvemonth is MYR 8,000 for machine DWDAE Co. , Ltd. and MYR 10,000 for WCHCME Co. , Ltd. The care cost that will happen in the first twelvemonth for DWDAE Co. , Ltd. is 4,500 and it will be increase MYR 550 per twelvemonth. While the care cost in the first twelvemonth for WCHCME Co. , Ltd. is MYR 8800 and it will be increase MYR 850 each twelvemonth.
The inlay hard currency flow projection for the machine DWDAE Co. , Ltd. investing, the expecting of hard currency influxs in twelvemonth 1 is MYR 45,000 and it will increase MYR 5,000 per twelvemonth. For the undertaking WCHCME Co. , Ltd. the anticipating hard currency influx in twelvemonth 1 amounting to MYR 60,000 and anticipating to increase per twelvemonth by MYR 7,500. The labour cost each twelvemonth that will be paid for working in DWDAE Co. , Ltd. is MYR 12,000 and for machine WCHCME Co. , Ltd. is 14,000. Furthermore both undertaking will be acquire the income revenue enhancement 30 % . Initial capital ( initial spendings ) obtained from CIMB Bank loan with an involvement rate of 7 % the first twelvemonth and 6 % the 2nd twelvemonth, 5 % for the 3rd and 4th old ages. Depreciation method used is the Straight Line Method and the Cost of Capital calculated for production machines DWDAE Co. , Ltd is 12 % and for machine WCHCME Co. , Ltd. The undertaking with the higher net present Value ( NPV ) has longer payback period. Mr. Naoya Nishiwaki need to show Net present value technique, Payback period, Discounted Payback period, Internal Rate of Return and Probability Index to allow the board know and decide.
Question
The board of managers of Panasonic Manufacturing Malaysia, which comprises of Tan Sri Datuk Asmat bin Kamaludi ( Chairman ) , Raja Dato Seri Abdul Aziz bin Raja Salim, Tan Sri Datuk Asmat Ramanaidu a/l Semenchalam, Soh Beng Kuan, Chen Ah Huat, Razman Hafidz bin Abu Zarim, Nobuyuki Kochi, Datuk Supperamaniam a/l Manickam, Takeo Endo is sing which of the two sole undertaking machine it should set about with the company cost of capital for production machines DWDAE Co. , Ltd is 12 % and 14 % A for WCHCME Co. , Ltd machines.
1. Construct a hard currency flow to rank the undertaking on the footing of:
Net Present Value ( NPV )
Payback Period
Discounted Payback Period
Internal rate of return ( IRR ) and
Profitability Index ( PI )
2. Compare your consequence above an advice the board of managers of the company which of the two undertaking machine to set about. Your advice should explicate why you regard your pick as the best undertaking.
Decision
Solution:
Pick the information to pull the hard currency flow:
DWDAE CO. , LTD. WCHCME CO. , LTD.
aˆ? The purchase monetary value 40 000 55 000
aˆ? Age economical machine 5 twelvemonth 5 twelvemonth
aˆ? Labor costs / twelvemonth 12,000 14,000
aˆ? Cost of installing of machinery 10,000 12,000
aˆ? Care costs:
First twelvemonth 4500 8800
The addition per twelvemonth 550 850
aˆ? residuary value engine ( twelvemonth 4 ) 8,000 10,000
aˆ? Receipt of hard currency:
The first twelvemonth 45 000 60 000
The addition per twelvemonth 5,000 7,500
aˆ? Income revenue enhancement 30 % 30 %
Depreciation ( Straight line method )
Year 0: 40,000
Year 1: ( 8,000 ) Depreciation
Year 2: ( 8,000 ) Depreciation
Year 3: ( 8,000 ) Depreciation
Year 4: ( 8,000 ) Depreciation
Balance: 8,000 ( Book Value )
RM 8,000 ( Book Value ) = RM 8,000 ( Price of machinery sold in twelvemonth 4 or Market Value )
Note = if the company may sell the machine above the monetary value value, so the net income from the sale will be capable to revenue enhancement ( Cash escape ) , but if the machine is sold below the monetary value book value, the company will acquire revenue enhancement freedom ( hard currency influx )
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Depreciation of Machine/year ( 40,000/5 )
8000
A
A
A
A
Value of machine-year 4 ( book value )
40,000
32,000
24,000
16,000
8,000
Monetary value machinery sold in twelvemonth 4
8,000
Cash Flow DWDAE Co. , Ltd. :
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
A
A
A
A
A
A
Cash Flow-Out ( RM )
A
A
A
A
A
The Purchase monetary value ( Initial Outlay )
40,000
A
A
A
A
labour Cost per twelvemonth
A
12,000
12,000
12,000
12,000
Cost of installing machinery
10,000
A
A
A
A
Care Cost
A
4,500
5,050
5,600
6,150
Interest paid
A
2800
2400
2000
2000
Entire Cash Out Flow
50,000
19,300
19,450
19,600
20,150
A
A
Cash In Flow ( RM )
A
A
A
A
A
Receipt of Cash
A
45,000
50,000
55,000
60,000
Residual value of engine ( twelvemonth 4 )
A
A
A
A
8,000
Entire Cash In Flow
0
45000
50000
55000
68000
Surplus/Deficit ( Cash in Flow- Cash escape )
-50,000
25,700
30,550
35,400
47,850
Income Tax ( 30 % )
A
-7710
-9165
-10620
-14355
Taxs of the gross revenues of machine
A
A
A
A
0
Cash Flow cyberspace ( Surplus- Income revenue enhancement )
-50,000
17,990
21,385
24,780
33,495
Interest Paid
So, involvement rate of 7 % the first twelvemonth, 6 % the 2nd twelvemonth and 5 % for the 3rd and 4th old ages.
Interest Paid = Interest rate per twelvemonth X purchase monetary value ( Initial Outlay )
1st twelvemonth: 7 % x 40,000 = 2,800
2nd twelvemonth: 6 % x 40,000 = 2,400
3rd twelvemonth: 5 % x 40,000 = 2,000
4th twelvemonth: 5 % x 40,000 = 2,000
Income Tax
Income revenue enhancement = per centum of income revenue enhancement ten ( Surplus Per twelvemonth )
1st twelvemonth: 30 % x 25,700 = RM 7,710
2nd twelvemonth: 30 % x 30,550 = RM 9,165
3rd twelvemonth: 30 % x 35,400 = RM 10,620
4th twelvemonth: 30 % x 47,850 = RM 14,355
Present Value of Net hard currency flow
After we get the Net hard currency flow, next we will seek for present value of each hard currency flow each twelvemonth to the present.
33,495
24,780
21,385
17,990
– 50,000
1st twelvemonth PV = Initial Outlay = 17,990 = 16,062.50
2nd twelvemonth PV = Initial Outlay = 21,385 = 17,047.99
3rd twelvemonth PV = Initial Outlay = 24,780 = 17,637.99
4th twelvemonth PV = Initial Outlay = 33,495 = 21,286.68
Net Present Value ( NPV ) :
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Net Cash Flow ( Surplus-tax )
-50,000
17,990
21,385
24,780
33,495
Present value of Net Cash Flow ( RM )
-50,000
16,062.50
17,047.99
17,637.91
21,286.68
= -50,000 + 16,062.50 + 17,047.99 + 17,637.91 + 21,286.68 = RM 22, 035
Payback Time period:
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Net Cash Flow ( Surplus-tax )
-50,000
17,990
21,385
24,780
33,495
Payback Period
-50,000
-32,010
-10,625
14,155
A
In Payback period It must be looked at the normal net hard currency flow
1st twelvemonth: -50,000 + 17,990 = -32,010
2nd twelvemonth: -32,010 + 21,385 = -10,625
3rd twelvemonth: -10, 625 + 24,780 = 14,155 ( Between twelvemonth 2 and twelvemonth 3 )
Payback period = 2 + 10,625 = 2, 6024 twelvemonth
24,780
So its 2,6024 twelvemonth
Discounted Payback Period:
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Present value of Net Cash Flow ( RM )
-50,000
16,062.50
17,047.99
17,637.91
21,286.68
Discounted Payback Period
-50,000
-33,938
-16,890
748
A
In Discounted Payback period It must be looked at the Present Value of Net hard currency flow
1st twelvemonth: -50,000 + 16,062.50 = -33,938
2nd twelvemonth: -33,938 + 17,047.99 = -16,8890
3rd twelvemonth: -16,890 + 17,637.91 = 748 ( Between twelvemonth 2 and twelvemonth 3 )
Discounted Payback period = 2 + 16,890 = 2, 9576 twelvemonth
17,637.91
So its 2,9576 twelvemonth
Internal Rate of Return ( IRR )
-501.1449
30 %
ten
0
12 %
22,035
30 % – Ten = -501.1449 – 0
X – 12 % 0 – 22,035
30 % – ten = ( ten – 12 % ) A- 0.02274
0.3 – ten = 0.02274 x – 0.002729
0.3 + 0.002729 = 0.02274 ten + ten
0.302729 = 1.02274 ten
X = 0.2959
X = 29.59 %
Profitability Index
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Present value of Net Cash Flow ( RM )
-50,000
16,062.50
17,047.99
17,637.91
21,286.68
Profitability index: 16,062.50 + 17,047.99 + 17,637.91 + 21,286.68 = 1.4407
50,000
Depreciation ( Straight line method ) for WCHCME CO. , LTD.
Year 0: 55,000
Year 1: ( 11,000 ) Depreciation
Year 2: ( 11,000 ) Depreciation
Year 3: ( 11,000 ) Depreciation
Year 4: ( 11,000 ) Depreciation
Balance: 11,000 ( Book Value )
RM 11,000 ( Book Value ) a‰ RM 10,000 ( Price of machinery sold in twelvemonth 4 or Market Value )
Tax charged/ Tax exempt from gross revenues machine = ( 10,000 – 11,000 ) A- 30 %
= -1,000 A- 30 %
= – 300 ( Cash influx )
Note = if the company may sell the machine above the monetary value value, so the net income from the sale will be capable to revenue enhancement ( Cash escape ) , but if the machine is sold below the monetary value book value, the company will acquire revenue enhancement freedom ( hard currency influx )
Undertaking
WCHCME CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Depreciation of Machine/year
11000
A
A
A
A
Value of machine-year 4 ( book value )
55,000
44,000
33,000
22,000
11,000
Monetary value machinery sold in twelvemonth 4
10,000
Cash Flow WCHCME Co. , Ltd.
Undertaking
WCHCME Co. , Ltd
A
A
A
A
Year
0
1
2
3
4
A
A
Cash Flow-Out ( RM )
A
A
A
A
A
The Purchase monetary value ( Initial Outlay )
55,000
A
A
A
A
Labor Cost per twelvemonth
A
14,000
14,000
14,000
14,000
Cost of installing machinery
12,000
A
A
A
A
Care Cost
A
8,800
9,650
10,500
11,350
Interest paid
A
3850
3300
2750
2750
Entire Cash Flow-Out
67,000
26,650
26,950
27,250
28,100
A
A
Cash Flow In ( RM )
A
A
A
A
A
Receipt of Cash
A
60,000
67,500
75,000
82,500
Residual value of engine ( twelvemonth 4 )
A
A
A
A
10,000
Entire Cash Flow -In
0
60000
67500
75000
92500
Surplus/Deficit ( RM )
-67,000
33,350
40,550
47,750
64,400
income Tax ( 30 % )
A
-10005
-12165
-14325
-19320
Taxs of the gross revenues of machine
A
A
A
A
300
Cash Flow cyberspace ( Surplus-tax )
-67,000
23,345
28,385
33,425
45,380
Interest Paid
So, involvement rate of 7 % the first twelvemonth, 6 % the 2nd twelvemonth and 5 % for the 3rd and 4th old ages.
Interest Paid = Interest rate per twelvemonth X purchase monetary value ( Initial Outlay )
1st twelvemonth: 7 % x 55,000 = 3,850
2nd twelvemonth: 6 % x 55,000 = 3,300
3rd twelvemonth: 5 % x 55,000 = 2,750
4th twelvemonth: 5 % x 55,000 = 2,750
Income Tax
Income revenue enhancement = per centum of income revenue enhancement A- ( Surplus Per twelvemonth )
1st twelvemonth: 30 % x 33,350 = RM 10,005
2nd twelvemonth: 30 % x 40,550 = RM 12,165
3rd twelvemonth: 30 % x 47,750 = RM 14,325
4th twelvemonth: 30 % x 64,400 = RM 19,320
Present Value of Net hard currency flow
After we get the Net hard currency flow, next we will seek for present value of each hard currency flow each twelvemonth to the present.
45,380
33,425
28,385
23,345
– 67,000
1st twelvemonth PV = Initial Outlay = 23,345 = 20,478.07
2nd twelvemonth PV = Initial Outlay = 28,385 = 21,841.34
3rd twelvemonth PV = Initial Outlay = 33,425 = 22,560.92
4th twelvemonth PV = Initial Outlay = 45,380 = 26,868.60
Net Present Value ( NPV ) :
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Net Cash Flow ( Surplus-tax )
-67,000
23,345
28,385
33,425
45,380
Present value of Cash Flow ( RM )
-67,000
20,478.07
21,841.34
22,560.92
26,868.6
= -67,000 + 20,478.07 + 21,841.34 + 22,560.92 + 26,868.60 = RM 24,749
Payback Time period:
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Cash Flow cyberspace ( Surplus-tax )
-67,000
23,345
28,385
33,425
45,380
Payback Period
-67,000
-43,655
-15,270
18,155
A
In Payback period It must be looked at the normal net hard currency flow
1st twelvemonth: -67,000 + 23,345 = -43,655
2nd twelvemonth: -43,655 + 28,385 = -15,270
3rd twelvemonth: -15, 270 + 33,425 = 18,155 ( Between twelvemonth 2 and twelvemonth 3 )
Payback period = 2 + -15270 = 2, 6768 twelvemonth
33,425
So its 2,6768 twelvemonth
Discounted Payback Period:
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Present value of Cash Flow ( RM )
-67,000
20,478.07
21,841.34
22,560.92
26,868.6
Discounted Payback Period
-67,000
-46,522
-24,681
-2,120
24,749
In Discounted Payback period It must be looked at the Present Value of Net hard currency flow
1st twelvemonth: -67,000 + 20,478.07 = -46,522
2nd twelvemonth: -46,522 + 21,841 = – 24,681
3rd twelvemonth: -24,681 + 22,560.92 = -2,120
4th twelvemonth: -2,210 + 26,868.6 = 24,749 ( Between twelvemonth 3 and twelvemonth 4 )
Discounted Payback period = 3 + -2,120 = 3.0789 twelvemonth
26,868.60
So its 3.0789 twelvemonth
Internal Rate of Return ( IRR )
-1,144 ( 30 % as rate in calculate PV )
30 %
ten
0
14 %
24,749
30 % – Ten = -1,144 – 0
X – 14 % 0 – 24,749
30 % – ten = ( ten – 14 % ) A- 0,00004622
0.3 – ten = 0,00004622 x – 0.000006471
0.3 + 0.000006471 = 0.00004622 ten + ten
0.300006471 = 1.00004622 ten
X = 0.29986
IRR = 29.98 %
Profitability Index
Undertaking
DWDAE CO. , LTD
A
A
A
A
Year
0
1
2
3
4
Present value of Cash Flow ( RM )
-67,000
20478.07
21841.34
22560.92
26868.6
Profitability Index = PV of hard currency flows subsequent to intial investing
Initial Investing
Profitability index: 20,478.07 + 21,841.34 + 22,560.92 + 26,868.60 = 1.3694
67000
2.
Project DWDAE Co. , Ltd WCHCME Co. , Ltd
IRR 29.59 % 29.98 %
Net nowadays value ( NPV ) 22,035 24,749
Payback period 2.6024 twelvemonth 2.6768 twelvemonth
Discounted payback period 2.9576 twelvemonth 3.0789 twelvemonth
Profitability index 1.4407 1.3694
Project WCHCME CO. , LTD. has more NPV comparison to project DWDAE Co. , Ltd. , even though it has a bit longer payback period. Since NPV method is preferred comparison to Payback period, we can reason that undertaking WCHCME Co. , Ltd is better than DWDAE Co. , Ltd.
Of the rivals to NPV, IRR must be ranked above both payback and profitableness index. In fact, IRR ever reaches the same determination as NPV in the normal instance where the initial escapes of an independent investing undertaking are merely followed by a series of influxs.
Based on the computation that we already done. We can reason that:
WCHCME CO. , LTD. have more somewhat higher IRR and NPV than DWDAE CO. , LTD..
However, the payback period and discounted payback period in WCHCME CO. , LTD. have a greater clip line to payback their initial spending.
Interestingly, profitableness index of DWDAE CO. , LTD. have greater value than WCHCME CO. , LTD.. Since this is a reciprocally sole undertakings, the profitableness index suffers from the graduated table job, which sometime besides suffered by IRR ( but in this instance IRR is non suffered ) .
Although WCHCME CO. , LTD. holding greater cost than DWDAE CO. , LTD. , it besides provides a greater gross and increased in sum of gross.
