Capital Budgeting Panasonic Manufacturing Malaysia Berhad Synopsis Accounting Essay

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Panasonic Manufacturing Malaysia Berhad is engaged in the manufacture and sale of electrical home appliances, batteries and related components. The Company principally operates in Malaysia, Japan, Asia/Middle East and others. The Company holds a 40% equity interest in its associated company, Panasonic Malaysia Sdn. Bhd, a company incorporated in Malaysia. The principal activities of the associated company consist of the sales of consumer electronic products, home appliances, batteries, office automation, project systems and room air-conditioners under the brand name, Panasonic.

In the late 2011, the production in Panasonic plant in Thailand was suspended due to flood disaster experienced. Minimizing the risk, the board member transferring 40% of production line from Panasonic Manufacturing Co. Ltd (Thailand) to Panasonic Manufacturing Malaysia Sdn. Bhd. Production of certain component will be shifted to Malaysia. Due to increasing of production capacity, Panasonic Manufacturing Malaysia Sdn. Bhd urged to invest a set of machine for production.

INTRODUCTION

Natural disaster is one of unpredictable factors which affect company benefit and even company's sustainability. Most of natural disasters contributed some interference in production lines of products in a plant, for instance flood that frequently occur in Thailand. It is creating some problems that drive the companies which located in the flooded area into huge losses in every aspects of business. Panasonic Corporation is one of the companies which have suffered from this natural disaster. The issue and the fact that flood is the dominant hazard in Thailand, with 1.5 events per year is being concerned as serious issue to be addressed soon by Panasonic Corporation as parent company in order to minimize the Panasonic global loss in the future. It is consequently will let Panasonic maintain its leadership in electronics products.

The Board Directors come up with the idea which is transferring the 40% production capacity from Panasonic Manufacturing (Thailand) Co., Ltd to Panasonic Manufacturing Malaysia Bhd. This new strategy is aimed to minimize the risk of the company from the future natural disaster, because Malaysia is relatively low risk in term of natural disaster if compared to Thailand. Some damage on production machines and equipments in Panasonic Manufacturing (Thailand) Co., Ltd - as the effect of flood, government's supporting, country's good infrastructure and excellent quality of its human resource may influence the decision of choosing Panasonic Manufacturing Malaysia Bhd. by Panasonic Board Directors.

Additional production capacity in Panasonic Manufacturing Malaysia Bhd. will take the respective management and the Board of Directors into no option except purchasing new machines and equipments which consequently bare the company's capital. Therefore, some units planning are established to estimate the investment's needs and risks in order to facilitate the board directors to generate a low-risk decision.

COMPANY BACKROUND

In the late 1920s Matsushita Electrical Industrial Co. Ltd. was founded by Konosuke Matsushita, nowadays its called Panasonic. Panasonic is a Japanese flag multinational electronics corporation headquartered in Kadoma, Osaka Japan. Panasonic has grown as giant electronic corporation alongside Sony, Toshiba and Canon. In addition electronic, Panasonic offer non-electronic products and services as well, such as home renovation and construction engineering. Panasonic is the world's fifth largest television manufacturer and semiconductor vendor.

The well-known recognized brand Panasonic has a long story behind the popular household name and the range of extensive consumer durables that carry its label stands its manufacturer, the foundation of the brand's success, Panasonic Manufacturing Malaysia Berhad - PMMA. In Malaysia Panasonic has a long-standing presence for more than 30 years since it was established in 1976.

Through out the years Panasonic has observed a swift or progress from its humble start as a producer of dry cell battery to Malaysian giant manufacturer leading in electronic appliances.

Presently, Panasonic brand name has emerged as one of the most welcome and trusted brand name for electrical and home appliance chosen by most Malaysian households. At Panasonic, it manufacture, operate and deliver maintain a series of product range with globally competitive models under the Panasonic brand name to the market, incorporating new features, enhanced capability and improved quality, and equally important, with our excellent after-sales-services.

Panasonic Malaysia Manufacturing Berhad-PMMA, was listed in KLSE on 14 December 1966. Nowadays Panasonic Malaysia Manufacturing Berhad having RM 60,7 million paid up capital and RM 701 million turnover, and 1030 number of employee. And the company mission to contribute Malaysian growth "We dedicated ourselves to the development of the nation and to the development of our industry. In our endeavors, we hope to improve the quality of life around us. Profit alone will not be our principal goal: we will also search for ways to benefit society" (PMMA Annual Report, 2011)

For the second consecutive year, the Company achieved double-digit growth in its revenue and for the financial year ended 31 March 2011, the Company achieved revenue of RM761.4 million an increase of RM81.6 million from the previous financial year's revenue of RM679.8 million.

The higher revenue stemmed mainly from the higher export sales to the Middle East region and the full impact on the transfer of manufacture and sales of certain food processor and juicer models from Japan to Malaysia in the financial year under review.

The stellar sales performance coupled with the implementation of cost reduction measures, improved operational efficiencies, higher interest income and foreign exchange gain enabled the Company to achieve a remarkable combined profit before tax of RM101.8 million for the year ended 31 March 2011. This represents an admirable increase of 28% or RM22.5 million against the previous year's combined profit before tax of RM79.3 million. The Company's share of its associated company's post-tax profit was RM8.4 million (2010: RM 6.8 million)

Panasonic Malaysia Sdn Bhd posted consolidated revenue of RM1.7 billion for the financial year ended 31 March 2011; an improvement of 7.3% compared with the previous financial year. The pre-tax and post-tax profits from its group operations were RM30.4 million (2010:RM23.0 million) and RM21.1 million (2010: RM17.0 million) respectively

With the marked improvement in performance, the Board of Directors is pleased to recommend a final dividend of 35 cent per share and a special dividend of 95 cent per ordinary share, less 25% income tax. This brings a total dividend of 145 cent (2010: 120 cent) per share for the financial year ended 31 March 2011. This amount represents an increase of 20.8% from the last financial year.

The Board believes that the consistently high dividend payment year after year has garnered much interest amongst the investment community on the shares of the Company. The share price of the Company has been rising steadily during the financial year under review closing at RM21.50 on 31 March 2011. This rise in share price gives an impressive capital appreciation to medium and long-term investors.

Panasonic had relentlessly attained a series of manufacturing innovation achievements and productivity improvements, amongst others:

Re-layout of assembly lines to increase production capacity for higher sales requirement.

Enhancement of various processes to improve the output capacity and to reduce CO2 emission.

Innovation of mould plating technology which resulted in lower maintenance cost and better quality.

Review of in-house plastic parts injection cycle time which resulted in big savings.

Application of new technology on top of the existing know-how.

Besides manufacturing innovation, the Company also focused on product innovation on new features, capability and quality. In this context, the engineers from the Company's Product Development and Engineering Department had managed to develop 179 new models of various products this year.

In order to improve further in product development, product designs and level of customer satisfaction, the employees had visited the Panasonic customer service branches and service centers to listen to the voice of customers directly. This collaboration had brought a lot of mutual benefits to all concerns, and enabled the teams to develop and introduce more competitive products via customer feedback.

As a responsible manufacturer, the Company undergoes regular audit to ensure various quality standards are adhered to. In the year under review, the auditors from Panasonic Corporation, Japan Headquarter carried out stringent audit on the Company's technical and quality system to ensure 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 recognising that the sustainability and prosperity of the Company is highly dependent on its employees, the Company introduced a new appraisal system with two-way communication, flexible working hours and offered special incentive for employees who acquire knowledge in fitting, finishing and injection skills, Appropriate actions were also taken to address concerns raised by employees via the Employee Opinion Survey. The Company will continue to maintain optimum vitality of the entire organisation by identifying high potential staff and provide adequate development for them to assume higher position.

ISSUE

Thailand has experienced its worst flooding in years over the last few months in 2011, leaving more than 420 people dead and causing severe damage across northern and central regions of the country. The floods have severely damaged and disrupted manufacturing operations in Thailand. Flooding has forced at least seven huge industrial estates in central regions to close, prompting the Federation of Thai Industries (FTI) to warn that damage to the industrial sector will be in the billions of dollars. It is interesting to note that none of the industrial plants in Thailand have been flooded in the past 40 years or so. The last major flood occurred in 1995, but the dykes in the industrial parks kept floodwaters out on that occasion. During this year's flooding, heavy machinery was reportedly not brought in to raise the height of dykes for fear of damaging them. Instead sandbags were used, which ultimately gave way to the floodwaters. As the floods have severely impacted manufacturers in central Thailand, insured losses from the event are expected to be significant.

Damage and disruption to the manufacturing sector has been massive after defences protecting several industrial estates were breached. The Labour Ministry said that more than 14,000 businesses nationwide have had to close because of the floods. Factories in the provinces of Ayutthaya and Pathum Thani were particularly badly hit. Reports said around 1,300 factories across central Thailand have been affected by the floods, disrupting manufacturing supply chains inside and outside of Thailand. Many of these industrial estates house both local and international factories and businesses, with large numbers making electronic components and car parts.

The production of electronics has been suspended as hundreds of factories are under water. Disruption to supply chains has also halted operations, raising fears that the flooding may have a knock on affect on global manufacturing. Indeed, officials expect disruption to operations to last several months and are warning the floods could have a similar impact on production as the Tohoku earthquake in March. Thailand plays a critical role in the global supply chain and companies are therefore seeking alternative production facilities or supply routes for parts.

Five industrial estates (Bang-Pa-in, Hi-Tech, Factory Land, Rojana and Saha Rattana Nakorn) in the badly affected province of Ayutthaya (Panasonic ) have been flooded. At Hi-Tech, reports said all 130 factories have been inundated by floodwaters of up to 3.4 meters deep. The Nava Nakorn industrial estate in Pathum Thani Province, one of Thailand's oldest and largest industrial estates with a high concentration of Japanese manufacturers, has also been evacuated after floodwaters submerged several factories

Officials at the Hi-Tech Industrial Estate said they were aiming to resume operations by mid-December if the floodwaters recede in early November. They added that it will take up to 10 weeks to drain away 12 million cubic meters of water in their facility. Officials at Nava Nakorn plant, meanwhile, said it will take 90 days to clean up after the water has receded and about one year to fully rebuild its infrastructure. Several electronics firms such as Panasonic have also suspended output at factories in Thailand because of the flood damage. Other companies have been affected by supply shortages.

Panasonic is the biggest producer of digital cameras, audio-visual products and home appliances in Thailand, where it has been in operation for 50 years. The company has ruled out relocating any of its production to another country. Hirotaka Murakami, the CEO of Panasonic Group in Thailand, always manages to smile when he's talking about business. But his smiling face, he confesses, hides a sad heart because the local operations of the Japanese company have faced a severe impact from flooding.

Panasonic operates 12 factories in Thailand. At one flooded plant in Rojana Industrial Park and two in Nava Nakorn, production is entirely halted. The disruption has forced some of its other plants it has two in Chachoengsao and seven in Samut Prakan to scale back their production because of shortages of components and supply of raw materials. Mr Murakami says it's too early to estimate the full damages, both from the flooding and subsequent inability to deliver goods as promised, as the flood is expected to expand further. Nonetheless, he admits damages would be immense if the floods affect operations in Chachoengsao and Samut Prakan, where as much as 80% of the output is for export.

The group expects sales in the third quarter of its 2011 fiscal year that ends next March 31 will definitely be affected, but sales are likely to recover in the fourth quarter, as spending on consumer goods and electrical appliances is expected to explode after flood. Panasonic's exports, mainly to Europe, Japan, the United States and Asia, are currently handled separately by its factories.

As the flood threat still exists, Mr. Murakami confirms the plan about factory relocation to another country. Production of certain parts for Panasonic will be shifted to Malaysia. To implement this strategy and due to natural disaster that frequently happen in Thailand, especially flood, Panasonic Corporation plans to reduce production capacity in term consolidate the production in Malaysia under Panasonic Manufacturing Malaysia Berhad. He and his team finally reassess the situation and set a new factory to increase the production to meet the current demand in the coming months.

At the end 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 support the transferring the plant production at Malaysia by increasing the current machine capacity by considering also not only a short term but long term capacity decision should be make. Consideration of collaborating and supporting effort to support the operation for Panasonic Group in Thailand until they recovered again.

After taken encountered of the present machines capacity in Malaysia, further more on the consideration of the preventive maintenance and workers are taken into account. The effective capacity shows that Panasonic group of Thailand are not in a equipped condition to support the Panasonic Manufacturing Malaysia Berhad during the reconstruction period. However, Mr. Naoya Nishiwaki has come out with two alternatives in order to being assessed two machinery investment proposals that needed immediately. In spite of that, considering also on meeting deadline of completion of setting up to buy the machine capacity within one month period. This is mainly due to the reconstruction activities which might take about nine to twelve month. at the By doing so, the product will have better quality and meet the production time to fulfill the demand.

A set of machine are needed to perform household appliance production line that consist of several production processes. It is started from components production for all components excluded electric motor and fan blade until product assembly. Both suppliers propose similar production lines and machines which slightly 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 area required installing the machines and equipments, where WCHCME Co., Ltd. proposes 2 hectares and DWDAE Co., Ltd. proposes 2.3 hectares.

DWDAE Co., Ltd. production machine investment cost is relatively cheaper when compared to the production machine WCHCME Co., Ltd. The purchasing price of the Machine DWDAE Co., Ltd. is MYR 40,000 with the cost of installation of machinery is MYR 10,000. Meanwhile the purchasing price of Machine WCHCME Co., Ltd. is MYR 55,000 with installation of machinery is 12,000. The age economical both machines are 5 years. Due, to the decision in which the machine will sell in the future, analysis the residual value engine in year 4 year is MYR 8,000 for machine DWDAE Co., Ltd. and MYR 10,000 for WCHCME Co., Ltd. The maintenance cost that will occur in the first year for DWDAE Co., Ltd. is 4,500 and it will be increase MYR 550 per year. While the maintenance cost in the first year for WCHCME Co., Ltd. is MYR 8800 and it will be increase MYR 850 each year.

The inlay cash flow projection for the machine DWDAE Co., Ltd. investment, the expecting of cash inflows in year 1 is MYR 45,000 and it will increase MYR 5,000 per year. For the project WCHCME Co., Ltd. the expecting cash inflow in year 1 amounting to MYR 60,000 and expecting to increase per year by MYR 7,500. The labor cost each year that will be paid for working in DWDAE Co., Ltd. is MYR 12,000 and for machine WCHCME Co., Ltd. is 14,000. Moreover both project will be get the income tax 30%. Initial capital (initial outlays) obtained from CIMB Bank loan with an interest rate of 7% the first year and 6% the second year, 5% for the third and fourth years. 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 project with the higher net present Value (NPV) has longer payback period. Mr. Naoya Nishiwaki need to present Net present value technique, Payback period, Discounted Payback period, Internal Rate of Return and Probability Index to let the board know and decide.

QUESTIONS

The board of directors 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 considering which of the two exclusive project machine it should undertake with the company cost of capital for production machines DWDAE Co., Ltd is 12% and 14% for WCHCME Co., Ltd machines.

1. Construct a cash flow to rank the project on the basis of :

Net Present Value (NPV)

Payback Period

Discounted Payback Period

Internal rate of return (IRR) and

Profitability Index (PI)

2. Compare your result above an advice the board of directors of the company which of the two project machine to undertake. Your advice should explain why you regard your choice as the best project.

Conclusion

Solution:

Pick the information to draw the cash flow:

DWDAE CO., LTD. WCHCME CO., LTD.

• The purchase price 40 000 55 000

• Age economical machine 5 year 5 year

• Labor costs / year 12,000 14,000

• Cost of installation of machinery 10,000 12,000

• Maintenance costs:

First year 4500 8800

The increase per year 550 850

• residual value engine (year 4) 8,000 10,000

• Receipt of cash:

The first year 45 000 60 000

The increase per year 5,000 7,500

• Income tax 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 year 4 or Market Value)

Note = if the company may sell the machine above the price value, then the profit from the sale will be subject to tax (Cash outflow), but if the machine is sold below the price book value, the company will get tax exemption (cash inflow)

Project

DWDAE CO., LTD

 

 

 

 

Year

0

1

2

3

4

Depreciation of Machine/year (40,000/5)

8000

 

 

 

 

Value of machine-year 4 (book value)

40,000

32,000

24,000

16,000

8,000

Price machinery sold in year 4

8,000

Cash Flow DWDAE Co., Ltd.:

Project

DWDAE CO., LTD

 

 

 

 

Year

0

1

2

3

4

 

 

 

 

 

 

Cash Flow-Out (RM)

 

 

 

 

 

The Purchase price (Initial Outlay)

40,000

 

 

 

 

labor Cost per year

 

12,000

12,000

12,000

12,000

Cost of installation machinery

10,000

 

 

 

 

Maintenance Cost

 

4,500

5,050

5,600

6,150

Interest paid

 

2800

2400

2000

2000

Total Cash Out Flow

50,000

19,300

19,450

19,600

20,150

 

 

Cash In Flow (RM)

 

 

 

 

 

Receipt of Cash

 

45,000

50,000

55,000

60,000

Residual value of engine (year 4)

 

 

 

 

8,000

Total Cash In Flow

0

45000

50000

55000

68000

Surplus/Deficit (Cash in Flow- Cash outflow)

-50,000

25,700

30,550

35,400

47,850

Income Tax (30%)

 

-7710

-9165

-10620

-14355

Taxes of the sales of machine

 

 

 

 

0

Cash Flow net (Surplus- Income tax)

-50,000

17,990

21,385

24,780

33,495

Interest Paid

So, interest rate of 7% the first year, 6% the second year and 5% for the third and fourth years.

Interest Paid = Interest rate per year X purchase price (Initial Outlay)

1st year : 7 % x 40,000 = 2,800

2nd year : 6% x 40,000 = 2,400

3rd year : 5% x 40,000 = 2,000

4th year : 5% x 40,000 = 2,000

Income Tax

Income tax = percentage of income tax x (Surplus Per year)

1st year : 30 % x 25,700 = RM 7,710

2nd year : 30% x 30,550 = RM 9,165

3rd year : 30% x 35,400 = RM 10,620

4th year : 30% x 47,850 = RM 14,355

Present Value of Net cash flow

After we get the Net cash flow, next we will search for present value of each cash flow each year to the present.

33,495

24,780

21,385

17,990

- 50,000

1st year PV = Initial Outlay = 17,990 = 16,062.50

2nd year PV = Initial Outlay = 21,385 = 17,047.99

3rd year PV = Initial Outlay = 24,780 = 17,637.99

4th year PV = Initial Outlay = 33,495 = 21,286.68

Net Present Value (NPV) :

Project

DWDAE CO., LTD

 

 

 

 

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 Period :

Project

DWDAE CO., LTD

 

 

 

 

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

 

In Payback period It must be looked at the normal net cash flow

1st year : -50,000 + 17,990 = -32,010

2nd year : -32,010 + 21,385 = -10,625

3rd year : -10, 625 + 24,780 = 14,155 (Between year 2 and year 3)

Payback period = 2 + 10,625 = 2, 6024 year

24,780

So its 2,6024 year

Discounted Payback Period :

Project

DWDAE CO., LTD

 

 

 

 

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

 

In Discounted Payback period It must be looked at the Present Value of Net cash flow

1st year : -50,000 + 16,062.50 = -33,938

2nd year : -33,938 + 17,047.99 = -16,8890

3rd year : -16,890 + 17,637.91 = 748 (Between year 2 and year 3)

Discounted Payback period = 2 + 16,890 = 2, 9576 year

17,637.91

So its 2,9576 year

Internal Rate of Return (IRR)

-501.1449

30 %

x

0

12 %

22,035

30% - X = -501.1449 - 0

X - 12 % 0 - 22,035

30 % - x = ( x - 12 %) Ã- 0.02274

0.3 - x = 0.02274 x - 0.002729

0.3 + 0.002729 = 0.02274 x + x

0.302729 = 1.02274 x

X = 0.2959

X = 29.59 %

Profitability Index

Project

DWDAE CO., LTD

 

 

 

 

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) ≠ RM 10,000 ( Price of machinery sold in year 4 or Market Value)

Tax charged/ Tax exempt from sales machine = (10,000 - 11,000) Ã- 30 %

= -1,000 Ã- 30%

= - 300 (Cash inflow)

Note = if the company may sell the machine above the price value, then the profit from the sale will be subject to tax (Cash outflow), but if the machine is sold below the price book value, the company will get tax exemption (cash inflow)

Project

WCHCME CO., LTD

 

 

 

 

Year

0

1

2

3

4

Depreciation of Machine/year

11000

 

 

 

 

Value of machine-year 4 (book value)

55,000

44,000

33,000

22,000

11,000

Price machinery sold in year 4

10,000

Cash Flow WCHCME Co., Ltd.

Project

WCHCME Co., Ltd

 

 

 

 

Year

0

1

2

3

4

 

 

Cash Flow-Out (RM)

 

 

 

 

 

The Purchase price (Initial Outlay)

55,000

 

 

 

 

Labor Cost per year

 

14,000

14,000

14,000

14,000

Cost of installation machinery

12,000

 

 

 

 

Maintenance Cost

 

8,800

9,650

10,500

11,350

Interest paid

 

3850

3300

2750

2750

Total Cash Flow-Out

67,000

26,650

26,950

27,250

28,100

 

 

Cash Flow In (RM)

 

 

 

 

 

Receipt of Cash

 

60,000

67,500

75,000

82,500

Residual value of engine (year 4)

 

 

 

 

10,000

Total Cash Flow -In

0

60000

67500

75000

92500

Surplus/Deficit (RM)

-67,000

33,350

40,550

47,750

64,400

income Tax (30%)

 

-10005

-12165

-14325

-19320

Taxes of the sales of machine

 

 

 

 

300

Cash Flow net (Surplus-tax)

-67,000

23,345

28,385

33,425

45,380

Interest Paid

So, interest rate of 7% the first year, 6% the second year and 5% for the third and fourth years.

Interest Paid = Interest rate per year X purchase price (Initial Outlay)

1st year : 7 % x 55,000 = 3,850

2nd year : 6% x 55,000 = 3,300

3rd year : 5% x 55,000 = 2,750

4th year : 5% x 55,000 = 2,750

Income Tax

Income tax = percentage of income tax Ã- (Surplus Per year)

1st year : 30 % x 33,350 = RM 10,005

2nd year : 30% x 40,550 = RM 12,165

3rd year : 30% x 47,750 = RM 14,325

4th year : 30% x 64,400 = RM 19,320

Present Value of Net cash flow

After we get the Net cash flow, next we will search for present value of each cash flow each year to the present.

45,380

33,425

28,385

23,345

- 67,000

1st year PV = Initial Outlay = 23,345 = 20,478.07

2nd year PV = Initial Outlay = 28,385 = 21,841.34

3rd year PV = Initial Outlay = 33,425 = 22,560.92

4th year PV = Initial Outlay = 45,380 = 26,868.60

Net Present Value (NPV) :

Project

DWDAE CO., LTD

 

 

 

 

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 Period :

Project

DWDAE CO., LTD

 

 

 

 

Year

0

1

2

3

4

Cash Flow net (Surplus-tax)

-67,000

23,345

28,385

33,425

45,380

Payback Period

-67,000

-43,655

-15,270

18,155

 

In Payback period It must be looked at the normal net cash flow

1st year : -67,000 + 23,345 = -43,655

2nd year : -43,655 + 28,385 = -15,270

3rd year : -15, 270 + 33,425 = 18,155 (Between year 2 and year 3)

Payback period = 2 + -15270 = 2, 6768 year

33,425

So its 2,6768 year

Discounted Payback Period :

Project

DWDAE CO., LTD

 

 

 

 

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 cash flow

1st year : -67,000 + 20,478.07 = -46,522

2nd year : -46,522 + 21,841 = - 24,681

3rd year : -24,681 + 22,560.92 = -2,120

4th year : -2,210 + 26,868.6 = 24,749 (Between year 3 and year 4)

Discounted Payback period = 3 + -2,120 = 3.0789 year

26,868.60

So its 3.0789 year

Internal Rate of Return (IRR)

-1,144 (30 % as rate in calculate PV)

30 %

x

0

14 %

24,749

30% - X = -1,144 - 0

X - 14 % 0 - 24,749

30 % - x = ( x - 14 %) Ã- 0,00004622

0.3 - x = 0,00004622 x - 0.000006471

0.3 + 0.000006471 = 0.00004622 x + x

0.300006471 = 1.00004622 x

X = 0.29986

IRR = 29.98%

Profitability Index

Project

DWDAE CO., LTD

 

 

 

 

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 cash flows subsequent to intial investment

Initial Investment

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 present value (NPV) 22,035 24,749

Payback period 2.6024 year 2.6768 year

Discounted payback period 2.9576 year 3.0789 year

Profitability index 1.4407 1.3694

Project WCHCME CO., LTD. has more NPV compare to project DWDAE Co., Ltd., even though it has a bit longer payback period. Since NPV method is preferable compare to Payback period, we can conclude that project WCHCME Co., Ltd is better than DWDAE Co., Ltd.

Of the competitors to NPV, IRR must be ranked above both payback and profitability index. In fact, IRR always reaches the same decision as NPV in the normal case where the initial outflows of an independent investment project are only followed by a series of inflows.

Based on the calculation that we already done. We can conclude that:

WCHCME CO., LTD. have more slightly higher IRR and NPV than DWDAE CO., LTD..

However, the payback period and discounted payback period in WCHCME CO., LTD. have a greater time line to payback their initial outlay.

Interestingly, profitability index of DWDAE CO., LTD. have greater value than WCHCME CO., LTD.. Since this is a mutually exclusive projects, the profitability index suffers from the scale problem, which sometime also suffered by IRR (but in this case IRR is not suffered).

Although WCHCME CO., LTD. having greater cost than DWDAE CO., LTD., it also provides a greater revenue and increased in amount of revenue.

By all this matter, we conclude to choose WCHCME CO., LTD.. For the most match project choosen.

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