finance

BUSM 5100: Acct. and Fin. for Managers (PT1)

Group Case Report

Magic Timber and Steel: Investment Evaluation with Net Present

Value

SUBMITTED BY: -

• Amritpal Singh (100393225) • Bavinderpal Singh (100394503) • Naman Kumar Anand (100393709) • Manissha Mauka (100365051)

SUBMITTED TO: -

• Terry Tekatch

April 10, 2020

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TABLE OF CONTENTS

Executive summary…………………………………………….....3

NPV Analysis with 11% discount rate and 30% tax...……………4

Senstivity Analysis………………………………………………..5

Quantitative Analysis……………………………………………..9

Recommendation……………………………………...……….....11

Conclusion………………………………………………………..12

Appendix…………………………………………………………17

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Executive Summary

Magic Timber and steel, a timber company formed in 1999, has recently been experiencing

decreasing revenues and turnover. This was attributed to many factors which include,

infrastructure issues and a slowdown of tourism. During early 2015, Magic’s owner John

Davidson, believes that an investment in equipment is necessary to reinvigorate the business.

He currently has a dilemma whether buying a new machine is worth the investment or it is

better to keep and sustain the old machine instead.

The method used to arrive at a decision was the Net Present Value (NPV) Method. This

method suggests that projects with a higher NVP should be taken over lower NPV projects.

To arrive at the project NPV, three items need to be determined: Operation Cash flow,

Change in Net working Capital, and Capital spending.

In this study we estimated and evaluated the Magic Timber company's Net Present Value for Old

Machine data and new computer data. We determined Net present value(NPV) with an 11 percent

discount factor for old machine, Net present value(NPV) with an 11 percent discount factor for

new machine, Then, we made sensitivity analysis with 12 percent Discount factor for old and new

machines by changing the existing machine delta maintenance costs and 5th year sale price of

delta, and finalising NPV estimates with all the changes together to find out whether Magic timber

company holds the old machine or goes for New machine.

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NPV Analysis with 11% discount rate and 30% tax

After detailed analysis of each case scenarios of both the machines it is advisable to purchase

the new wood cutter machine. In NPV analysis, the difference between the present value of

cash inflows and outflows over a period is reflected. A project is only feasible if the NPV value

is positive. In magic timber case there is only outflows so NPV represents the expenses. In all

the scenarios the NPV for the old machine showed higher expenses. So, it is viable for Magic

timbers to consider the purchase of the new machine.

But the decision cannot be solely based on the NPV calculations because there are many

quantitative and qualitative factors that may affect the cash flows of the company. Like, the

new machine offered an increase in capacity of 40 percent. In addition, it allowed possibility

of obtaining some custom works for a specialist woodcrafter, which can furthermore help in

to increase sales, as a customized work can generate more profit than a regular item. In order

to make use of the increased capacity, we recommend Magic company to conduct survey to

find out what customers expecting new things and new designs. Based on the requirement, we

recommend him to hire expert in custom designers to generate state-of-the-art design which

will attract more customers.

On the other side, if we talk about the old machine its calls for huge investment as the machine

will require $ 63000 which is breakdown as $ 28000 required immediately for the repair, $7000

every 5 years and the larger scheduled service in the third year which will cost around $4000.

Also, it will claim depreciation of $6000 per year and after 5 years, it would be a scrap and

would be sold for only $5000 bucks. Investing so much with less hope of generating revenue

is definitely not an ideal deal to take up.

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SENSTIVITY ANALYSIS:

 QUALITATIVE FACTORS

 EXPERIENCE AND REPUTATION OF MAGIC

Magic Timber and Steel (Magic) was formed in 1999 in Caloundra. The long duration

of successful business from 1999 to 2015 is a good indicator for customers to buy

products from the company.

During the growth phase of the company from 2002 to 2004 , Magic earned a

reputation for being a supplier with good discount on products which helped the

company to acquire a substantial core of builders as its customers.

 USING SECOND HAND MACHINERY

In July 2002, the purchased a large new Scania truck for picking up products and

providing delivery services. There was also investment made in machinery. The

financial position was good and they were happy to pay for new Scania truck but they

still decided to purchase only secondhand machinery.

 DECLINING ECONOMIC ENVIRONMENT AND COMPETITORS

In 2011 , there was decline in Magic sales due to some infrastructure issues on the

coast, slowdown in the tourism industry, and a decrease in population growth (less

than 4 per cent in 2011).Due to this bad debts of Magic increased and had negative

impact on financial position. To add to the situation Wesfarmers Limited opened

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Bunnings Warehouse near to Magic’s premises. Bunnings was a direct competitor to

Magic.

 RECENT EXPENDITURE

o During 2013 and 2014, Davidson undertook an increased marketing

campaign to reinvigorate Magic and also added steel to Magic’s product

line.He purchased a large laser cutting machine leading to capital outlay of

$300,000.

 NEW APPROACH TO BUSINESS

Davidson with time reduced Magic’s stock levels rather than holding a diverse range

he kept only products market demanded. This lead to loss of customers as Magic did

not stock what they needed to purchase. Davidson continued with his strategy of

stocking core items at good prices and offered expert and friendly assistance.

Stock control and adding steel to product line were the reason he was able

to survive in the market.

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 QUANTITATIVE FACTORS

NEW MACHINERY (DELTA )

The new machinery would lead to increase in capacity of 40% . This was in excess of

Magic’s needs. Owing to the present situation of declining economic growth and loss of

customers the company will not be able to fully use the increased capacity although business

could make some use of it.

The new machine cost $140,000.

Straight line depreciation of 10 per cent per annum.

Depreciation charged for five years ( $14000 * 5 = $ 70000 )

Maintenance plan = The seller offered fixed pricing starting at $2,000 in the first year,

increasing by $1,000 per year (payable at year end). $(2000+3000+4000+5000+6000) =

$20000

To fund the purchase, Magic’s bank offered a 6 per cent per annum loan to be repaid as

interest-only payments for five years with the full principal repayable at the end of the loan

period. ( 8400 per year interest) ( 8400*5 = $ 42000)

Repay the loan ( $140000) at the end of loan period.

After five years, Magic would sell the Delta for $60,000.

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OLD MACHINERY REPAIR (MATRIX)

IMMEDIATE PAYMENT = $28,000

$7,000 in regular maintenance in each of the next five years.

(7000 * 5 = $35000)

In Year 3, the machine would require another investment of $4,000 for a larger scheduled

service.

My analysis concludes that Magic should not invest in a new machinery rather he should

go for repairing the old machinery.

The company had a good name and customer base when the company was growing during

2002 to 2004.

When financial position was good then also they purchased second hand machinery. Now in

not so good financial position they should do the same and not invest in new machinery.

The economic environment was favourable. But the current declining economic environment

with competitors like Bunnings has lead Magic to keep limited stock so increase in capacity

by 40 % will not benefit.

He has recently incurred huge expenditure on marketing and in purchasing large laser cutting

machine. The company is not in a good position to invest in purchasing a new machinery.

Cost involved in purchasing a new machinery is more than the expected benefits from the

investment in new machinery.

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Quantitative Analysis [Appendix 2, 3 and 4]:

a) Net present value with discount factor of 12%

Performing a sensitivity analysis by tweaking several assumptions will help in

understanding the changes in output such as net present value (NPV) of a project, internal rate of

return (IRR), and discounted payback period, Annual rate of return. It also provides a better

understanding of the risks associated with a project with respect to the input changes. By doing

so we can identify the input variables that represent the greatest vulnerability for the project.

From appendix I.C and II.C, Changes in discount rate (11% to 12%) affect the output values

positively, increasing the operating cost savings by a mere $138.67 while reducing the payback

year from 3.36 to 3.34 and the Internal rate of return of the project remains unchanged at 15%

along with the Annual rate of return at 12% which is independent of the discount factor. But

there Is a slight drop in the profitability index from 2.49 to 2.39. With minor changes to the net

present value and the Internal rate of return (15%) greater than the discount rate (11% and 12%),

it is a good decision to invest in the new machine, as the increase in discount factor affects the

decision positively as the decision is less sensitive to changes in discount rate.

b) Net present value with year 5 selling price of delta at AUD80,000

If the selling price of Delta will be changed to $80,000, the new machine would be the

more favourable option for Davidson. As seen in Appendix 3-A, the costs will still be lower at

$253,943.67 for Delta comparing to $289,093.62 amount of costs for Matrix. The projected

annual operating costs for the old machine from 2016-2020 will be higher than the Matrix. For

2021, operating costs for the new machine will be higher mainly because of payment of the loan

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principal is due that year. Davidson will also have a net savings of $35,149.95 in 2021 for this

option compare to when Delta has a selling price of $60,000. Looking at the payback period, it

will only take the company 2.99 years to recover form the cost of investment which is way better

than 3.36 years. There is also a substantial difference when it comes to internal and annual rate

of return of Delta at 21% and 22% respectively, comparing to 15% and 12% of the old machine.

c) Net present value with maintenance costs for delta (year 1 cost is

aud1,000, increasing by aud1,000 each year)

If maintenance costs for Delta will be changed to $1,000 for Year 1 and increasing by

$1,000 by each year, present value of total costs will be $255,230.46 which is $33,863.16 lower

than the costs that will be incurred for the old machine. For the first 4 years, operating costs will

still be lower if Delta is bought with an average yearly savings of $7,589.35. For year 2021,

annual cost will be higher at $57,297.97 for Delta comparing to $41,213.74 of Matrix; this is

because the principal of the loan used to purchase the new machine needs to be paid at this year.

Talking about payback period, Davidson will get the return of his investment of new machine

after 3.1 years which is just a few months earlier than with Matrix at 3.36 years. Internal rate of

return and annual rate of return are also looking better than with the old machine at 18% and

16%, respectively. There is no significant difference when it comes to profitability index – 2.43

for Delta while for Matrix it is 2.46.

d) Net Present Value Analysis with all the above factors (ii, iii, iv)

together

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When we change discount rate to 12%, Year 5 selling price of Delta to $80,000, and

adjust on the maintenance costs, the new machine would be the best option for Davidson. He will

be able to save $37,556.33, which is the highest amount of savings among all the other scenarios

given in this sensitivity analysis. The main reason for this is the expensive yearly maintenance

costs of the old machine and large investments needed immediately and on Year 3 ($28,000 and

$4,000). Total annual operating costs for the company will be lower with the new machine but

not until 2021 when Davidson needs to pay the principal of the loan he acquired. This scenario

also has the shortest payback period at 2.8 years. It is the earliest time his investment will reach

the breakeven point, which only proves again that buying the new machine is very desirable for

the company. Internal and annual rate of return are also the highest at 23% and 25%,

respectively. The profitability index in this case is the lowest at 2.33 however, the ratio is still

greater than 1 which means buying the new machine will still be profitable and an attractive

investment move for Davidson.

RECOMMENDATION

After the analysis of the case we recommend David should go for the decision to buy new

Wood cutter finisher. As keeping the same machine will also need $63000 which is

breakdown as $28000 required immediately for repair, $7000 every 5 year and the larger

scheduled service in the third year will cost approximately $4000. We think it is not a good

idea to invest large amount on the machine which will not contribute to increase in revenue,

it will also claim depreciation of $6000 every year and after 5 years it would be a scrap and

would be sold for $5000.

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Secondly the safety issues with this machine. Its sensitive nature towards angle of the

timber and its tendency to kick back severely increase lumber is not correctly positioned

and even you are reluctant to allow other staff members to use this machine. It is possible

it can harm any labour when it gets old. To ensure employee safety, we strongly

recommend him to take necessary steps to train every employee how to use machine

correctly. We recommend him to conduct training sessions from industry experts every

month or twice a month, explain the right method to use the machine.

On the other hand, new machine offered an increase in capacity of 40 percent. In addition,

it also allow possibility of obtaining some custom workd for a specialist woodcrafter,

which can later help in to increase sales, as customised work can generate more profit that

a regular item. In order to take the advantage of incresed capacity we recommend Magic

company to conduct survey to find out what is customer’s expectations about

customization and new designs. Based on the requirements, we recommend him to hire

expert in custom design.

Even interest only repayment for 5 years( the bank loan of 6 % per annuam) and the

flexibility of repaying the full principal at teh end of the loan period also eases the debt

problem, as the amount that will received after selling the old machine($35000) could be

directly used to pay interests for 4 years(.06*105000 = 6300, 6300*4 – 25200). This

calculation means taht you have complete 4 years to begin your actual payments for this

machine, and by the calculation it doesn’t seems like in these 4 years, with increase in

capacity of 40 percent, it will be difficult to manage the repayment of this machine. Also

considering the worst case scenario(even though probability of the scenario to occur is

low), it could be sold out for $60000. With the proceeding from the old machine, we

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recommend him to invest on any fixed asset like machinery which will help him ease of

doing business and can reduce the labour cost.

Another advantage is the Technical advancement of Delta over Matrix which would

consequently lead to significant saving in both labour and electricity expense which are

$5250 (10% of $30*35*50 here 35 hours a week and 50 working weeks in a year) and

$4725 (10% of $50625*24*7*50 here 24 hours a day, 7 days a week and 50 working

weeks) respectively in the first year. Even this labour and electricity savings will increase

each year by fixed $250 and $75 respectively. The seller of Delta being in a competitive

market is willing to negotiate in terms of maintenance plan.

Minimal amount of $2000 for the maintenance (compated to the capacity it would increase)

and just a $1000 increase per year, also to be paid not in advance but at the end of year also

falls in line with the purchase of new machine. Even the forecast Revenue and net profit

indicates the continuous decline which will one day lead to the liquidation of the Magic.

There is no denying that slow tourism market, decrease in population growth and

infrastructural issue effects the overall business, but he should also consider the fact that

Queensland Sunshine coast still remain one of the Fastest growing regions which is

undoubtly a light of hope in this dark economic environment.

We also recommend him to introduce new product into the production by doing survey

with most valuable customers. In this way Magic company will be in competition with

other competitors. Even the recent establishment of Bunnings Warehouse store in the area

(relatively recent as compared to Magic’s establishment in 1999) also signifies a better

scope of business in the upcoming years because these big organizations hire a team of

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Analysts at backend and no new branch is settled up untill and unless surveys are done and

future predictions of sales turns out to be positive on the bases of data and statistics.

Bases on the qualitative factors, we would highly recommend David to have a health

schemes for all the employees for safety measures. If doesn’t give importance to all these

factors, there is a possibility he can face legal issues, licensing and which would to closing

the company. We believe buying this new machine will prove to a good decision and can

help his company to competitive and survive in market.

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CONCLUSION:

To sum up, we may suggest that David will go for wood cutter finisher as it would also take huge

sums of money to maintain the same machine and will cost 7000 for maintenance per year. In

comparison, New machines have provided a 40 percent increase in capability and provided the

possibility of certain personalised works which also help to increase the sales as personalised

products can produce more income than standard ones. He should also provide appropriate

instruction to staff that it is not correctly configured how to operate the machine due to the

protection of the machine, i.e. sensitivity to the angle of the wood and its propensity to push back

lumber. We strongly recommend that he hold monthly professional training sessions. Delta's

technological progress would also lead to substantial labour and cost savings in five years,

respectively. Last but not least, we can conclude that buying new machine is a smart move and

will allow the company to survive on the market and remain solvent.

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Appendix 1:

MAGIC TIMBER AND STEEL : INVESTMENT EVALUATION WITH NET PRESENT VALUE

(A)

Discounted at 11%

OLD MACHINE

Period 0 1 2 3 4 5 Operating Expenses

Labour -52500.00 -52500.00 -52500.00 -52500.00 -52500.00 Electricity -47250.00 -47250.00 -47250.00 -47250.00 -47250.00

Maintenance -28000.00 -7000.00 -7000.00 -11000.00 -7000.00 -7000.00 Salvage value 5000.00

Cost before tax -28000.00 -106750.00 -106750.00 -

110750.00 -

106750.00 -101750.00

Cost after tax -19600.00 -74725.00 -74725.00 -77525.00 -74725.00 -71225.00 Depreciation

expense 6000.00 6000.00 6000.00 6000.00 6000.00

Depreciation tax shield

0.00 1800.00 1800.00 1800.00 1800.00 1800.00

Total cost -19600.00 -72925.00 -72925.00 -75725.00 -72925.00 -69425.00 Discount Factor 1.00 0.90 0.81 0.73 0.66 0.59

Total cost discounted @ 11% (Present

value)

-19600.00 -65698.13 -59185.93 -55370.12 -48035.70 -41203.74

Annual Cash Operating cost

-289093.62

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(B)

Discounted at 11%

NEW MACHINE

Period 0 1 2 3 4 5 Operating Expenses

Labour -47250.00 -47000.00 -46750.00 -46500.00 -46250.00 Electricity -42525.00 -42450.00 -42375.00 -42300.00 -42225.00

Maintenance -2000.00 -3000.00 -4000.00 -5000.00 -6000.00 Interest -6300.00 -6300.00 -6300.00 -6300.00 -6300.00 Principal payable

-105000.00

Salvage value 60000.00 Cost before tax 0.00 -98075.00 -98750.00 -99425.00 -100100.00 -145775.00 Cost after tax 0.00 -68652.50 -69125.00 -69597.50 -70070.00 -102042.50 Depreciation

expense 16000.00 16000.00 16000.00 16000.00 16000.00

Depreciation tax shield

0.00 4800.00 4800.00 4800.00 4800.00 4800.00

Total cost 0.00 -63852.50 -64325.00 -64797.50 -65270.00 -97242.50 Discount Factor 1.00 0.90 0.81 0.73 0.66 0.59

Total cost discounted @ 11% (Present

value)

0.00 -57524.72 -52206.17 -47379.93 -42993.35 -57713.42

Annual Cash Operating cost

-257817.59

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(C)

Old Equipment Remaining life 5 Current salvage value 35000.00 Salvage value in 5 years 5000.00 Discounted Annual Cash Operating costs 289093.62 New Equipment Cost 140000.00 Estimated useful life 5 Salvage value in 5 years 60000.00 Discounted Annual Cash Operating costs 257817.59

Initial investment 105000.00 Net Savings 31276.03 Payback year 3.36 Internal Rate of Return 3.35720 15% Annual Rate of Return 12% Net Savings non discounted

28037.50

Profitability Index 2.46

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(D)

NPV Calculation at DF 11% Present value of annual cash inflows 31276.03 3.6959 115593.1 Salvage value 60000 0.59345 35607 Capital investment 5000-140000 -135000 Net Present Value 16200.08 16200 5 years at 11%, PV of ordinary annuity

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Appendix 2:

Appendix 2.A - DISCOUNTED AT 12%

Discounted at 12% OLD MACHINE

Period 0 1 2 3 4 5 Operating Expenses

Labour -52500.00 -52500.00 -52500.00 -52500.00 -52500.00 Electricity -47250.00 -47250.00 -47250.00 -47250.00 -47250.00

Maintenance -28000.00 -7000.00 -7000.00 -11000.00 -7000.00 -7000.00 Salvage value 5000.00

Cost before tax -28000.00 -106750.00 -106750.00 -110750.00 -106750.00 -101750.00 Cost after tax -19600.00 -74725.00 -74725.00 -77525.00 -74725.00 -71225.00 Depreciation

expense 6000.00 6000.00 6000.00 6000.00 6000.00

Depreciation tax shield

0.00 1800.00 1800.00 1800.00 1800.00 1800.00

Total cost -19600.00 -72925.00 -72925.00 -75725.00 -72925.00 -69425.00 Discount Factor 1.00 0.89 0.80 0.71 0.64 0.57

Total cost discounted @ 12%

(Present value) -19600.00 -65111.82 -58135.08 -53899.54 -46345.30 -39393.83

Annual Cash Operating cost

-282485.56

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(B)

Discounted at 12%

NEW MACHINE

Period 0 1 2 3 4 5 Operating Expenses

Labour -47250.00 -47000.00 -46750.00 -46500.00 -46250.00 Electricity -42525.00 -42450.00 -42375.00 -42300.00 -42225.00

Maintenance -2000.00 -3000.00 -4000.00 -5000.00 -6000.00 Interest -6300.00 -6300.00 -6300.00 -6300.00 -6300.00

Principal payable -105000.00 Salvage value 60000.00

Cost before tax 0.00 -98075.00 -98750.00 -99425.00 -100100.00 -145775.00 Cost after tax 0.00 -68652.50 -69125.00 -69597.50 -70070.00 -102042.50 Depreciation

expense 16000.00 16000.00 16000.00 16000.00 16000.00

Depreciation tax shield

0.00 4800.00 4800.00 4800.00 4800.00 4800.00

Total cost 0.00 -63852.50 -64325.00 -64797.50 -65270.00 -97242.50 Discount Factor 1.00 0.89 0.80 0.71 0.64 0.57

Total cost discounted @ 12% (Present

value)

0.00 -57011.34 -51279.25 -46121.56 -41480.39 -55178.31

Annual Cash Operating cost

-251070.86

(C)

Old Equipment Remaining life 5 Current salvage value 35000.00 Salvage value in 5 years 5000.00 Discounted Annual Cash Operating costs

282485.56

New Equipment Cost 140000.00 Estimated useful life 5 Salvage value in 5 years 60000.00

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Discounted Annual Cash Operating costs

251070.86

Initial investment 105000.00 Net Savings 31414.70

Payback year 3.34 Internal Rate of Return 3.34238 15% Annual Rate of Return 12% Net Savings non discounted 28037.50 Profitability Index 2.39

(D)

NPV Calculation at DF 12% Present value of annual cash inflows 31415 3.60478 113244.2 Salvage value 60000 0.56743 34045.8 Capital investment 5000-140000 -135000 Net Present Value 12289.96 12290 5 years at 12%, PV of ordinary annuity

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Appendix 3:

(A)

Discounted at 11% NEW MACHINE

Period 0 1 2 3 4 5 Operating Expenses

Labour -47250.00 -47000.00 -46750.00 -46500.00 -46250.00 Electricity -42525.00 -42450.00 -42375.00 -42300.00 -42225.00

Maintenance -2000.00 -3000.00 -4000.00 -5000.00 -6000.00 Interest -6300.00 -6300.00 -6300.00 -6300.00 -6300.00

Principal payable -105000.00 Salvage value 80000.00

Cost before tax 0.00 -98075.00 -98750.00 -99425.00 -100100.00 -125775.00 Cost after tax 0.00 -68652.50 -69125.00 -69597.50 -70070.00 -88042.50 Depreciation

expense 12000.00 12000.00 12000.00 12000.00 12000.00

Depreciation tax shield

0.00 3600.00 3600.00 3600.00 3600.00 3600.00

Total cost 0.00 -65052.50 -65525.00 -65997.50 -66470.00 -84442.50 Discount Factor 1.00 0.90 0.81 0.73 0.66 0.59

Total cost discounted @ 11%

0.00 -58605.80 -53180.09 -48257.37 -43783.79 -50116.62

Annual Cash Operating cost

-253943.67

(B)

Old Equipment Remaining life 5.00 Current salvage value 35000.00 Salvage value in 5 years 5000.00 Discounted Annual Cash Operating costs 289093.62

New Equipment Cost 140000.00 Estimated useful life 5.00 Salvage value in 5 years 80000.00

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Discounted Annual Cash Operating costs 253943.67

Initial investment 105000.00 Net Savings 35149.95

Payback year 2.99 Internal Rate of Return 2.98720 21% Annual Rate of Return 22% Net Savings non discounted 36037.50 Profitability Index 2.42

(C)

NPV Calculation at DF 11% Present value of annual cash inflows 35150 3.6959 129911 Salvage value 80000 0.59345 47476

Capital investment 5000-140000 -135000 Net Present Value 16200.1 5 years at 11%, PV of ordinary annuity

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Appendix 4:

(A)

Discounted at 12% NEW MACHINE

YEAR 2016 2017 2018 2019 2020 2021 Period 0 1 2 3 4 5

Operating Expenses

Labour -47250.00 -47000.00 -46750.00 -46500.00 -46250.00 Electricity -42525.00 -42450.00 -42375.00 -42300.00 -42225.00 Interest -6300.00 -6300.00 -6300.00 -6300.00 -6300.00

Principal payable -105000.00 Maintenance -1000.00 -2000.00 -3000.00 -4000.00 -5000.00 Salvage value 80000.00

Cost before tax 0.00 -97075.00 -97750.00 -98425.00 -99100.00 -124775.00 Cost after tax 0.00 -67952.50 -68425.00 -68897.50 -69370.00 -87342.50

Depreciation expense 12000.00 12000.00 12000.00 12000.00 12000.00 Depreciation tax shield 0.00 3600.00 3600.00 3600.00 3600.00 3600.00

Total cost 0.00 -64352.50 -64825.00 -65297.50 -65770.00 -83742.50 Discount Factor 1.00 0.89 0.80 0.71 0.64 0.57

Total cost discounted @ 12% (Present value)

0.00 -57457.77 -51677.84 -46477.45 -41798.15 -47518.01

Annual Cash Operating cost

-244929.23

(B)

Remaining life 5.00 Current salvage value 35000.00 Salvage value in 5 years 5000.00 Discounted Annual Cash Operating costs 282485.56

Cost 140000.00 Estimated useful life 5.00 Salvage value in 5 years 80000.00 Discounted Annual Cash Operating costs 244929.23

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Initial investment 105000.00 Net Savings 37556.33

Payback year 2.80 Internal Rate of Return 2.79580 23% Annual Rate of Return 25% Net Savings non discounted 39537.50 Profitability Index 2.33

(C)

NPV Calculation at DF 12% Present value of annual cash inflows 37557 3.60478 135384.7

Salvage value 80000 0.56743 45394.4 Capital investment 5000-140000 -135000

Net Present Value 45779.12

5 years at 12%, PV of ordinary annuity

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Appendix 4.1

SWOT ANALYSIS:

Strengths:

 They buy second-hand machines instead of new machines which are also good

choices not to spend massive amounts on brand new equipment.

 The company was successful, and the small premises ultimately outgrown. The

most positive thing is that they are able to store the supplies of hardware in the shop

and buy their own new truck to pick up the items to sell and provide the customers

with the delivery service. They have invested in a large variety of machinery.

 Getting strong market awareness and forecasting the future of the company is the

major benefit of owners. Another benefit is that they specialised in "seconds"

timber packs, which were sold at discounted rates to the retail market.

 Their ability to manage the company with minimal personnel and to operate as

workers, another permanent employee, and two casual on-call employees as

needed.

Weaknesses:

 The older timber machinery had announced its age, and the big finisher was more

troublesome. Replacing old machine magic owners needs tremendous investment

in buying new equipment.

 Ánother downside and the major one to the Magic company is To minimise stock

levels of Magic, substitute them only as required by the market, rather than having

a wide collection. Not surprisingly, this inventory management strategy meant that

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some consumers shopped elsewhere because Magic did not store what they wanted

to purchase.

Opportunities:

 While tourism industry slowed, and population growth decreased, the Sunshine

Coast remained one of Australia's fastest-growing regions. Owner's ability to add

new line steel to the production line for the Magic.

Threats:

 As a result of the deteriorating economic climate, a number of builders holding accounts

with Magic went into liquidation, leaving the company with bad debts that had to be written

off or put on payment schedules, another critical problem faced by the company is a

circumstance that had a direct effect on Magic's own financial position.

 Increased competition from a large publicly traded Australian retailer, Wesfarmers Limited

is yet another major challenge to the magic timber business.

 Business faced a significant challenge from a variety of causes, including coastal

infrastructure problems, a recession in the tourism industry and a decrease in population

growth.