ltd
Group 1 Section 2: Javed Haider 2013-02-0109 Maliha Khan 2013-02-0247 Mehreen Seher Hai 2013-02-0059 Muhammad Wajih Haider 2013-02-0247 Salik Nazimuddin Chaturbhai 2013-02-0183 Salman Farooq 2013-02-0186
Introduction
Executive Summary
Main aim: to cater to the growing local demand of computers by domestic and corporate users. Services offered: maintenance, software upgrades. Research comprises of similar enterprises. Feasible investment considering the gap in supply and demand of support services and affordable computers. Initial investment = PKR 15 million of which PKR 3 million is loan.
Industry Analysis
The business will be prone to fluctuations in global and local economic movements. The industry drivers are discussed below: Exchange Rates: One of our main cost drivers since products are being imported from abroad mainly the US. Government Policy: Import duties and tariffs may affect profitability and pricing decisions. Political Instability: An instable environment will lead to decrease in demand and thus revenue. Inflation: Both domestic and international inflation will affect our business. Interest Rates and Sales Tax: High sales tax will increase prices and high interest rates will discourage investment affecting our demand.
Assumptions
Constant owners equity Projected inflation figures from IMF data Unit costs from primary market research. Averaged out and marked up (increasingly every year) to obtain SP Growth rate constant at 10% Depreciation Straight Line Method
Financial Statements
Ratio Analysis
Profitability: Found to be reasonable due to ratios below: Gross Profit/ Net Profit Margins increase steadily, due to steady increase in sales and constant expenses. Return on Capital Employed and Return on Equity both increase at acceleration, due to constant equity and decreasing debt.
Liquidity: Found to be quite high, as proven 100% by: Current/Acid test ratios almost 80% constant and above 2, which is 60% very liquid but perhaps too much. 40% (wastage) 20% Net Working Capital to Total 0% Assets increases, as liquidity Year 1 within our assets increases due to constant F.A. and increasing cash flow and inventory.
FA NWC
Year 4
Efficiency: Increases over time, as: Debt is repaid Debt to Equity ratio decreases. Fixed Asset turnover increases and we earn more reveue on all assets invested.
14000000 12000000 10000000 8000000 6000000 4000000 2000000 0 Year 1 Debt Year 5 Debt FA
Investment Ratios: Healthy investment related activities: Increasing profit earned on inv as EPS and DPS increase. Financial obligations can easily be met. dividend cover and interest cover both high.
9000000 8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 Interest 0 Interest Dividend year 1 year 3 year 5 Net Profit
Others: % change in sales is nearly constant, due to growth and markup. % change in profit is a lot at start and then becomes normal, thus affecting degree of operating leverage. Payout ratio shows we start paying dividend once were out of breakeven phase and into profit making phase.
WACC
Calculation of WACC
WACC was 17.828 Cost of equity was computed by taking a market rate of return of 31 % , an equity risk premium of 6.36 Cost of loan was 18% WACC= (Cost of equity) * 0.8 + 18*0.2*0.65
= 17.828
Sensitivity Analysis
Sensitivity Analysis
5 key variables All increased and decreased by 25% Internal Factors
Mark up Rate of miscellaneous expenses
External Factors
Inflation Growth rate Exchange rate
-NPV fell by 63.5% -Net profit fell by up to 9% -IRR decreased from 21% to 19% The reason for such results is that the business adds a certain mark up on costs, thus as costs increase, with demand held constant, our sales will increase.
Exchange Rate
Revalued by 25%
-NPV increased by 1574.38 % -Net profits increased by 141% in the last year(5th) of forecasts -IRR increased from 21% to 65%
Devaluation by 25%
-NPV fell by 2068% and turned negative -Profits turned into losses -IRR would have to be extremely low for the project to be feasible
The business will have to reduce its reliance on imported goods or it should sign future exchange rate contracts to avoid the risk of such variances in its forecasts
A decrease by 25%
-NPV fell by 355% and turned negative -Net profit fell by up to 34% in the last year of forecasts -IRR decreased from 21% to 9%
Miscellaneous Expenses
An Increase from 1% to 1.25%
-NPV fell by 21% -Net profits fell by 2 to 4% -IRR decreased from 21% to 20%
Though the miscellaneous account for only a minor part pf the expenses, their impact on the NPV is quite significant.
Scenario Analysis
Scenario 1
What if the a law is passed to ban the import of used computers. This means consumers of imported used computers shift to alternatives. Changes due to the policy: Increase in demand Increase in our mark-up Increase in Inventory Hiring more labour
This results into an increase in profits although we are increasing our costs but the Increase in demand is higher.
Scenario 2
We assume that United States of America intervene in our war against Terrorism in Waziristan How our business is affected Huge decline in demand Increase in prices due to depreciation in exchange rate Will decrease Inventory Ask some staff to leave Decrease advertising cost Decrease markup
This results in our business making a loss for first two years and after the 3rd year do we make some profits.
Initial years, 2010 and 2011, show a negative divergence between required and actual cash flows In 2012 the actual cash flow almost equals the required cash flow Years 2013 and 2014 show cash flows exceeding the required level This can be primarily attributed to a higher level of sales and increased margins in the later years
Cash flows
initial (15,000,000.00)
2010
2011
2012
2013 7,928,151.26
2014
3,357,872.58
3,016,547.26
4,754,285.34
10,010,083.42
Average Cashflow
$4,777,992.77
$4,777,992.77
$4,777,992.77
$4,777,992.77
$4,777,992.77
Difference
(1,420,120.19)
(1,761,445.51)
(23,707.42)
3,150,158.49
5,232,090.65
Conclusion
References
The ministry of information technology has been asked to draft a proposal for a ban on the import of used computers and IT accessories. (Dawn Front page article, 6 March 2010). 2009: Macro, Politics and the Market. Pakistan Strategy Report December 2009. JS Global Capital limited Stock market investors make 31pc gains in 10 years. Erum Zaidi. The Nation. April 29 2010. Estimating the Equity Risk Premium for Economies in the Asian Region. Michael B Cohen. Asian Journal of Accounting and Finance. 2009. Vol 1 No.1 .Web.
Questions