6050 Group Project Report v4.0

Project: New Computer Product
City University of Hong Kong

Department of System Engineering and Engineering Management MEEM 6050 Engineering Economic Analysis (Semester A, 2011-12)
MEEM 6050 Engineering Economic Analysis
Group Project Report
Student Name
LU Shan
Student number
52541490
LI Xi
52410662
XU Sha
51982297
CHEN Pengyu
52472302
YAO Mo
52467562
REN Yanling
52302337
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Abstract
The company depends on their current finance situation to set objectives to make our company as one of the listed companies in Hong Kong. To achieve this aim, our company designs two types of PC products. According to break-even analysis, sensitivity analysis and scenario analysis, we find the break-even point of demand and the different IRR of two products. To make the best profits, we choose product two eventually.
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Table of Contents
Introduction...........................................................................................................2
Problem Definition................................................................................................2
Setting Objectives..................................................................................................2
Financial Statements.............................................................................................2
4.1 4.2 4.3 4.4 4.5 4.6 4.7
Balance Sheet.........................................................................................2 Income Statement....................................................................................2 Cash Flow Statement................................................................................2 Debt Management Analysis........................................................................2 Liquidity Analysis....................................................................................2 Asset Management Analysis.......................................................................2 Profitability Analysis................................................................................2
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Alternative Identification, Evaluation and Selection (Computer)....................2
5.1 5.2
Alternative Products.................................................................................2 Marketing Strategy...................................................................................2
Alternative Identification, Evaluation and Selection (Finance)........................2
6.1 6.2
Alternative Selection................................................................................2 Bank loan offer and Selection.....................................................................2
Risk Management..................................................................................................2
7.1 7.2 7.3 7.4
Break Even Analysis.................................................................................2 Sensitivity Analysis..................................................................................2 Scenario Analysis....................................................................................2 Recommendation.....................................................................................2
Conclusion..............................................................................................................2
Conclusion
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1 Introduction
Ocean is a computer manufacturing company, established by LU Shan, XU Sha, LI Xi, REN Yanling, YAO Mo, and CHEN Pengyu in November 2009. Headquartered in Hong Kong, the company has a production factory, in which have totally 5 departments and 100 workers. The objective of our company is to become one of listed companies in Hong Kong after 5 years. We want to attract some external investors to invest our business, and the proposal of our company development as follows.
2 Problem Definition
Based on Hong Kong business circumstance nowadays, the competitive situation is much harsh than the previous one we understood, especially for computer and electronic industries. For long-term development to achieve the organizational goals, we are facing following problems:
To develop new products to capture market share;
Lack of initial capital for the new products R&D and manufacture.
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1 Setting Objectives
As mentioned above, we have the aim and mission to fulfill. There is no doubt that, Hong Kong is a perfect place to start up an industry, even several economic crisis still leaves impacts on the financial market. We already have factory plant, manufacturing line, material and component supplier, and human resources, both engineers and salesman included. Thus, we definitely have the plan to develop a brand new product that can take over percentages of computer market, and establish a sustainable developed company image in the long run.
Our aim is to make our company as one of the listed companies in Hong Kong. As Hong Kong market has long history, it has high requirement and reputation to the candidate companies. If we want to be the listed company, several requirements and objects we have to fulfill at one, before we enjoy the benefit from Hong Kong stock market, such as credit extending.
Therefore, we set up four targets:

Net income of the first year should above 2 million HKD; Total income of three years should above 5 million HKD; Gross margin should above 25% or more;
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Net after-tax profit should above 15% of sales income.
1 Financial Statements
As it is a 2-year running company, first and foremost, we tend to show the financial statements of past 2 years and give a brief analysis for our financial status.
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4.1 Balance Sheet
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BALANCES HEET
Period Ending Assets Current Assets Cash And Cash Equivalents Short-Term Investments Net Receivables Inventories Other Current Assets year 1 in HK dollars (000) year 2
8,884 5,732 4,570 359 1,342
11,281 11,894 5,843 484 3,363
Long-Term Investments Property Plant and Equipment G oodwill Intangible Assets Accumulated Amortization Other Assets Deferred Long-Term Assets Charges
T l C rre t A s ts ota u n s e
2 ,8 7 0 8
1,739 3 6 363 998 84
3 ,8 5 2 6
2,332 17 9 334 609 1,166
T lAs t ota s e
Liabilities Current Liablities Accounts Payable Short/Current Long-Term Debt Other Current Liabilities
2 ,1 7 4 0
3 ,5 3 7 0
6,019 3,568
9,568 6,921
T l C rre t L b ota u n ia ilitie s

Long-Term Debt Other Liabilities Deferred Long-Term Liability Charges Minority Interest Negative Goodwill
9 8 ,5 7
798 5,026
1 ,4 9 6 8
985 6,952
T lL b s ota ia litie
S c h d rs E u to k o e ' q ity Preferred S tock C m S om on tock R etained Earning s Treasury S tock C apita S l urplus Other S tockhoder E quity
1 ,4 1 5 1
50 10 84 66
2 ,4 6 4 2
61 88 113 35
6 0
7 .6
T l S k old r E u ota toc h e q ity
186 30
198 9 7 .6
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Table 4.1 Balance Sheet
4.2 Income Statement
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INCOME STATEMENT
Period Ending year 1 in HK dollars (000) year 2
Total R evenue
Cost of Revenue Direct labor Material Overhead Depreciation
22,806
4,120 3,568 3,335 4,036
30,855
5,572 4,765 4,230 5,700
Tatal Cost of R evenue Gross Profit

Operiating Expenses Research Development Selling Generaland Administrative
15,059 7,746
1,503 2,815
20,267 10,588
1,054 3,573
OperatingIncom or L e oss
Income from Continuing Operations Total Other Income/Expenses Net Earning Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest
3,428
569 3,997 0 3,997 660 -
5,961
589 6,550 0 6,550 1,081 -
Net Incom e
3,337
5,469
Table 4.2 Income Statement
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4.3 Cash Flow Statement
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CASH FLOW STATEMENT

in HK dollars(000) Period Ending Ca flowsfromopera sh tinga ctivities Net income Items not requiring an outlay of cash: Depreciation, Depletion & Amortization Depreciation and Depletion Amortization of Intangible Assets Deferred Taxes & Investm Tax Credit ent Deferred income taxes Investment Tax Credit Stock-based compensation Other Funds Net changes in workingcaptial item s yea 1 r 3337 301 237 64 74 74 0 241 1264 yea 2 r 5469 450 345 105 -350 -350 0 511 3914
N c h prov et as ided by operatingactiv ities

Ca flowsfromfinancingac sh tivities Cash Dividends Paid - Total Common Dividends Preferred Dividends Change in Capital Stock Repurchase of Common & Preferred Stk. Sale of Common & Preferred Stock Proceeds fromStock Options Other Proceeds fromSale of Stock Issuance/Reduction of Debt, Net Change in Current Debt Change in Long-TermDebt Issuance of Long-TermDebt Reduction in Long-TermDebt Other Funds Other Uses Other Sources
521 7
0 0 0 344 -3 347 0 347 0 0 0 0 0 358 0 358
99 4 9
0 0 0 341 -118 459 0 347 0 0 0 0 0 719 0 719
N c h prov et as ided by (used in) financ activ ing ities

Ca folwsfrominvestingac sh tivities Capital Expenditures Capital Expenditures (Fixed Assets) Capital Expenditures (Other Assets) Net Assets fromAcquisitions Sale of Fixed Assets & Businesses Purchase/Sale of Investm ents Purchase of Investments Sale/Maturity of Investments Other Uses Other Sources
702
-936 -698 -238 0 0 -2204 -11153 8949 0 47
10 0 6
-1139 -1036 -103 -209 0 -6422 -21850 15428 -10 0
N c h us in investingac ities et as ed tiv

Miscellaneous Funds Net Change in Cash Free Cash Flow
-3 3 09
0 2812 4503
-77 0 8
0 2394 8085
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Table 4.3 Cash Flow Statement
4.4 Debt Management Analysis
Figure 4.4 Debt management ratios
Debt Management 4.4.1 Debt Ratio

Ratios that show a firm use debt financing and its ability to meet debt repayment obligations.
Our companys debt ratios are:
Year 1 Debt ratio=Total debtTatal assets=$15411$24107=63.93% Year 2 Debt ratio=Total debtTatal assets=$24426$37503=65.13%
Figure 4.4.1 Debt ratios of the two years
Because of a debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. As we can see from the consequence, our companys debt ratio less than 1, which means our firm has lower investment risk.
1.4.2
Time-Interest-Earned Ratio
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Times Interest Earned or Interest Coverage is a great tool when measuring a company's ability to meet its debt obligations. This ratio by dividing earnings before interest and income taxes (EBIT) by the yearly interest charges that must be met. However, because of our company do not have long-term debt, so we do not have interest expense at this time, which contribute to the times-interest-earned ratio is not defined.
4.5 Liquidity Analysis
Figure 4.5 Ratios related to liquidity analysis
Liquidity Analysis
Ratios that show the relationship of a firms cash and other assets to its The excess of current assets over current liabilities is known as working capital, a current liabilities
figure that indicates the extent to which current assets can be converted to cash to meet current obligations. Therefore, a firms net working capital as a measure of its liquidity position. In general, the larger the working capital, the better able the business is to pay its debt.
4.5.1
Current Ratio
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We calculate the current ratio by dividing current assets by current liabilities, and our companys current ratios are: Year 1 times Year 2 times Current ratio=Current assetsCurrent liabilities=$32865$16489=1.99 Current ratio=Current assetsCurrent liabilities=$20887$9587=2.18
Figure 4.5.1 Current ratios of the two years
The ratio is mainly used to give an idea of the company's ability to pay back its shortterm liabilities (debt and payables) with its short-term assets (cash, inventory, and receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. We can conclude that our company is in good financial health, because of our current ratios are both higher than 1 in the two years.
4.5.2
Quick (Acid- Test) Ratio
We calculate the quick ratio by deducting inventories from current assets and then dividing the remainder by current liabilities.
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Our companys Quick ratios are: Year 1 Quick ratios=Current assets-InventoriesCurrent liabilities=$20887$359$9587=2.14 times
Year 2 Quick ratios=Current assets-InventoriesCurrent liabilities=$32865$484$16489=1.96 times
Figure 4.5.2 Quick ratios of the two years
The quick ratio measures how well a company can meet its obligations without having to liquidate or depend too heavily on its inventory. Inventories are typically the least liquid of a firms current assets; hence, they are the assets on which losses are most likely to occur in case of liquidation. The higher the quick ratio is, the better the position of the company. The quick ratios of our company tell us we could pay all of our current liabilities if they came due immediately
4.6 Asset Management Analysis
Figure 4.6 Ratios related to asset management
Asset Management
A set of ratios which measure how effectively a firm is managing its assets
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4.6.1
Inventory Turnover
Inventory turnover ratio shows how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days".
Inventory Turnover Ratio=
sales , and our companys Inventory turnover averageinv entory
ratios are:
Year1
ITR1=
sales A verage In ventory
= $22806 $359
=63.53 times
Year2
ITR2=
sales A verag e Invento ry
= $30855
=63.75 times
$484
ITR2>ITR1, it means our company has good liquidity and the better ability of turning inventory into cash or accounts receivable in year 2.
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4.6.2
Days Sales Outstanding
This ratio is a measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money. Re ceivable The formula is DSO= annualsales , and our companys DSO ratios are: 365
Year1
Re ceivable 4570 DSO1= annualsale = 22806 =73.14 s 365 365
Year 2
Re ceivable 5843 = DSO2= annualsale s 30855 =69.12 365 365
The result is DSO1>DSO2, it means our company in year2 has the chance to put the cash to use again through quickly turning sales into cash.
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4.6.3
Total Assets Turnover
Total Asset Turnover Ratio measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better.
Total Asset Turnover Ratio=
Netsales TotalAssets
Year 1 TATR1= Netsales = 22806 =0.95 TotalAssets 24107
Year2 TATR2= Netsales = 30855 =0.82 TotalAssets 37503 We can see TATR1>TATR2, it means our company in year 2 is generating a sufficient volume of business for the size of our asset investment.
4.7 Profitability Analysis
Profitability Analysis
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A set of ratios which show the combined effects of liquidity, asset management, and debt on operating results
Figure 4.7 Ratios related to profitability analysis
4.7.1
Profit Margin on Sales
Net Margin Ratio illustrates what percentage of each sales dollar is retained in earnings.
Year 1
($) Net Margin Ratio1= NetIncome = 3337 =14.6% NetSales 22806
Year 2
Net Margin Ratio2= NetIncome($) = 5469 =17.7% NetSales 30855
Net Margin Ratio2>Net Margin Ratio1, it means our company converting sales into profits after all expenses are subtracted out is better in year 2 than in year 1.
4.7.2
Return on Total Assets
The return on total assets is a ratio that measures a company's earnings before interest and taxes (EBIT) against its total net assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. The formula of this ratio is:
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ROTA=
EBIT NetIncome+ InterestEx pense+ Taxes = TotalNetAssets TotalNetAssets
And our firms ratios are: Year 1 ROTA1= 3337+ 660 =0.166
24107
Year2
ROTA2= 5469+ 1081 =0.175

37503
ROTA2>ROTA1, it indicates that our company in year 2 is more effectively to be using its assets.
4.7.3
Return on Common Equity
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
The formula is
ROE=
NetIncome Shareholde s Equity r'
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Year 1
ROE1=
NetIncome = 3337 =24.2% Shareholde s Equity 13806 r'
Year 2
ROE2=
NetIncome = 5469 =27.4% Shareholde s Equity 19978.6 r'
Because of ROE2>ROE1, it indicates that the shareholders are earning more money in year 2 on their shares.
5 Alternative Identification, Evaluation and Selection (Computer)
5.1 Alternative Products
In order to fulfill our target, we plan to invest new computers. After careful examination, we find out that to invest and develop a new product with our own brand is much better and profitable than pure manufacturing or designing for other company. As we already run a computer manufacturing industry for two years, and we have excellent and experienced designing, testing, quality assurance engineers, that is to say we have already built an entire group to develop and function a brand new product. Besides that, we have hired two new engineers who graduate from top
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universities in United States, and they bring back the latest technology that can be applied to our designing phase and manufacturing phase.
Figure 5.1 Sales Forecast for PC and Tablet
Before research and design phase, we have study the PC market report these years. We can see that, with coming of information era, people gain more and more need to have a own personal especially portable computer to process data at anywhere ant time. Since the first coming of laptop, the sales amount of laptop keeps increasing for decades. While in the year 2010, which we call the first year of tablet, it has become a promising and neglectable product which brings unpredictable profits. And we decided to invest in tablet and gain more profit and reputable.
In order to increase the market share, we have studied two kinds of tablet product as our target. The product 1 is quite stable, and wed like to design it into a business tablet. As we all know, with the fast pace of the economic world, that businessman have to travel very often to get bills done or to negotiate with other competitors. So the key function they want is
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flexibility, mobility, portable, stable, security. So thats why we design this tablet. It looks like a normal laptop, but it is much superior to laptop. It can bend 30 degree and work as a desktop, which can give better view and convenience when displaying and processing document. At the same time, it can bend 180 degree and work as tablet. This tablet provide with great security, that business man can check email and stock market anytime they want, and without any possibility of leakage of information.
The
product
two
we
promote
is
an
entertainment tablet. As the appearance of Ipad, that we got to know that, the power of entertainment and service market is
neglectable, it can bring great profits and chances. So in this tablet, we emphasis the entertainment function, that young people can use it as PlayStation, social network hub, video camera, movie player. It equipped with OLED touch screen, which looks super modern and fashionable.
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5.2 Marketing Strategy
When conducting market strategy, 4P criteria has to be considered in order to make wise decisions.
The first P is Product Product is the baseline for a company, if a company cannot design a product that good enough, it cannot develop in a sustainable way. Besides the design, quality of the product is also a very important factor that affects the customers decision. Even though the service develops adequately, none of the consumer would like to repair the product very often. Thus the quality of the product is a great insurance of consumer experience. Moreover, good and mutual interaction with customers has to be established. Since, if we want to sell product continuously, we should keep a good relation with consumer, if they get good experience, they will trust our company, our design and our service. Actually their rating affects the market value and reputation of the company. The final part of the product is professionalism of the design. Actually there are so many fake product in the market, if the product is not superior or not unique, that you will find duplicates in the market very soon. Therefore, all the product should be very professional and impossible to copy.
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The second P is Pricing Before the investment and retailing process, the purchasing power has to been examined. If consider the appreciation rate, the purchasing power has increase several times these decades. The price between 3000 HKD to 5000 HKD is acceptable, since it is the same amount as the spare money of a normal people. If people want to buy the product, it is far from impossible, that he can save some money for 1 month, then, he will get a high tech product. Another topic that is very hot recently is value-added feature. Since apple imported the concept value-added service, the iTunes store earn large amount of money. Therefore, our company has to consider the value-added feature. The preliminary idea is to set up an online store, where our customer can buy things use a specific icon, and several discount will be offered. Besides that, as our product is a high tech product, that people likes to show off if they got such kind of things. So wed like to design some luxury goods to match the tablet. We believe that, our product can give great confidence to our customer, to let them feel like as if they are success men.
The third P is Promotion Nowadays, prompting a product is even much more important an appealing than the real product. If the advertisement is innovative and impressive, which leaves an unforgettable memory on audience mind, the audience my turn into potential
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customer just one second after they watched advertisement. Besides that, demonstration is also very important. Roadshow is a kind of new word that come into being recently, that the manufacture tends to display their product on the road, and let any people to try it. The apple platinum experiment store in Central is a good example in case. Every customer who steps into the three floor store can touch and play and use all the product in the store. Then the costumer gained valuable experience and in person judgment of your product, and they can decide whether to purchase one at the store. Finally, coupon promotion is a direct way to attract potential customer and let them to purchase more because the certain requirement of the coupon. Then our company can gain more profit per head.
The fourth P is Place Twenty years ago, the only purchasing channel is from shopping mall and supermarket. Nowadays with the development of internet and software technology, various ways of purchasing come into being and stand the test from both time and market. Official store is good way real purchasing, people can buy things in our official store and register as member, then more discount information and privileges will be sent to them. B2C website is also a good choice after the successful model of eBay and Taobao. The young generation tends to buy things from internet, which is more time saving and money saving method. 3C chain store is a booming and new
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shopping style in China. And we can give delegation to 3C store and use their local retailing network to sell the product.
6 Alternative Identification, Evaluation and Selection (Finance)
6.1 Alternative Selection
As the selling strategy we stated above, we would like to set the price of our two products as follows:
Product 1: As the target consumer of this product is businessman. The character of businessman is they are rich, and always busy, lack of considering the purchasing choice, emphasis the portability, stable and security. So the electronic component of product one is high-end, leading to the total price of it are much higher. So the price of it is 4888 HKD.
Product 2: The target consumer of this product is young people. They are not rich enough, but they are eager to have new things to show off. As they are young and intelligent, we
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can add more feature and functions to this tablet. The industry design and appearance has to be attractive and fashionable enough. The price we set for this is 3999 HKD.
Descriptions
Product 1
Product 2
LCD Monitor
HKD 890.00
HKD 1,011.00
USB I/O Port
HKD 15.00
HKD 12.00
IC
HKD 702.00
HKD 470.00
PCB
HKD 64.00
HKD 36.00
Memory
HKD 387.00
HKD 214.00
HDD
HKD 520.00
HKD 270.00
Display & Sound
HKD 279.00
HKD 310.00
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system
Total Cost
HKD 2,857.00
HKD 2,323.00
Price
HKD 4,888.00
HKD 3,999.00
Table 6.1.1 Details for Products Price
As the price and our market survey, the sales amount we predict is like below. Our market is limited to Hong Kong local market, which is relatively small compare to international market and mainland market. At the beginning, both product 1 and 2 gain good reputation, and the sales amount will reach a peak in the year 3. After year 3, the sales amount of product 2 will keep increasing, as the completeness of the function and more improvement. The sales mount of product 1 will start to decrease at year 4 and 5. In the year 5, product 2 will be the powerful candidate in the market and take over the market share of product 1.
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Year 1
Year 2
Year 3
Year 4
Year 5
Product 1
8400
10220
10780
10080
9660
Product 2
9940
10360
10640
11060
11340
Table 6.1.2 Sales Forecast for Products
Figure 6.1 Sales Forecast for Products
Apart from products price and sales forecast, we also made a calculation about project initial capital.
Investment
Product 1
Product 2
Devices and other
HKD 7,000,000.00
HKD 4,000,000.00
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Salvage Value (in year 5)
HKD 500,000.00
HKD 500,000.00
R&D
HKD 1,800,000.00
HKD 1,800,000.00
Office
HKD 9,500,000.00
HKD 9,500,000.00
Others
HKD 500,000.00
HKD 400,000.00
Total
HKD 19,300,000.00
HKD 16,200,000.00
Table 6.1.3 Initial Capital for New Products
In consideration of inflation influence, we predict the labor cost will increase based on 10% inflation.
Per unit
Year 1
Year 2
Year 3
Year 4
Year 5
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Labor Cost
HKD 300.00
HKD 330.00
HKD 363.00
HKD 399.30
HKD 439.23
Table 6.1.4 Labor Cost
We set the MARR for the new product is 20% as well as 16.50% tax-rate and 15% long-term interest. Then, we prepare the income and cash flow statements for both alternative products.
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Income Statement
Product 1 Revenue Expense Materials Labour Overhead Depreciation R&D SG&A Taxable Income Income Taxes (16.5%) Net Income Y ear 0 Year 1 HKD 41,059,200.00 Y ear 2 HKD 49,955,360.00 Y ear 3 HKD 52,692,640.00 Y ear 4 HKD 49,271,040.00 Y ear 5 HKD 47,218,080.00
(HKD 23,998,800.00) (HKD 29,198,540.00) (HKD 30,798,460.00) (HKD 28,798,560.00) (HKD 27,598,620.00) (HKD 2,520,000.00) (HKD 3,372,600.00) (HKD 3,913,140.00) (HKD 4,024,944.00) (HKD 4,242,961.80) (HKD 220,000.00) (HKD 240,000.00) (HKD 280,000.00) (HKD 230,000.00) (HKD 220,000.00) (HKD 2,895,000.00) (HKD 2,460,750.00) (HKD 2,091,637.50) (HKD 1,777,891.88) (HKD 1,511,208.09) (HKD 1,800,000.00) (HKD 800,000.00) (HKD 420,000.00) (HKD 150,000.00) HKD 0.00 (HKD 2,600,000.00) (HKD 2,700,000.00) (HKD 2,700,000.00) (HKD 2,300,000.00) (HKD 2,300,000.00) HKD 11,425,400.00 HKD 14,683,470.00 HKD 15,609,402.50 HKD 14,439,644.13 HKD 13,645,290.11 (HKD 1,885,191.00) (HKD 2,422,772.55) (HKD 2,575,551.41) (HKD 2,382,541.28) (HKD 2,251,472.87) HKD 9,540,209.00 HKD 12,260,697.45 HKD 13,033,851.09 HKD 12,057,102.84 HKD 11,393,817.24
Product 2 Y ear 0 Revenue Expense Materials Labour Overhead Depreciation R&D SG&A Taxable Income Income Taxes (16.5%) Net Income
Year 1 HKD 39,750,060.00
Y ear 2 HKD 41,429,640.00
Y ear 3 HKD 42,549,360.00
Y ear 4 HKD 44,228,940.00
Y ear 5 HKD 45,348,660.00
(HKD 23,090,620.00) (HKD 24,066,280.00) (HKD 24,716,720.00) (HKD 25,692,380.00) (HKD 26,342,820.00) (HKD 2,982,000.00) (HKD 3,418,800.00) (HKD 3,862,320.00) (HKD 4,416,258.00) (HKD 4,980,868.20) HKD 190,000.00 HKD 240,000.00 HKD 270,000.00 HKD 280,000.00 HKD 310,000.00 (HKD 2,430,000.00) (HKD 2,065,500.00) (HKD 1,755,675.00) (HKD 1,492,323.75) (HKD 1,268,475.19) (HKD 1,800,000.00) (HKD 700,000.00) (HKD 340,000.00) (HKD 110,000.00) HKD 0.00 (HKD 2,600,000.00) (HKD 2,700,000.00) (HKD 2,650,000.00) (HKD 2,400,000.00) (HKD 2,400,000.00) HKD 11,437,440.00 HKD 12,119,060.00 HKD 12,484,645.00 HKD 12,907,978.25 HKD 13,066,496.61 (HKD 1,887,177.60) (HKD 1,999,644.90) (HKD 2,059,966.43) (HKD 2,129,816.41) (HKD 2,155,971.94) HKD 9,550,262.40 HKD 10,119,415.10 HKD 10,424,678.58 HKD 10,778,161.84 HKD 10,910,524.67
Table 6.1.5 Income Statements for New Products
Product 1
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Operating Activities
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Net Income
HKD
HKD
HKD
HKD
HKD
9,540,209.00 12,260,697.45 13,033,851.09 12,057,102.84 11,393,817.24
Depreciation
(HKD
(HKD
(HKD
(HKD
(HKD
2,895,000.00) 2,460,750.00) 2,091,637.50) 1,777,891.88) 1,511,208.09)
Investment Activities
Investment
(HKD 19,300,000.00)
Salvage Value
HKD 500,000.00
Net Cash Flow
(HKD 19,300,000.00)
HKD 6,645,209.00
HKD
HKD
HKD
HKD
9,799,947.45 10,942,213.59 10,279,210.97 10,382,609.14
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Product 2
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Operating Activities
Net Income
HKD
HKD
HKD
HKD
HKD
9,550,262.40 10,119,415.10 10,424,678.58 10,778,161.84 10,910,524.67
Depreciation
(HKD
(HKD
(HKD
(HKD
(HKD
2,430,000.00) 2,065,500.00) 1,755,675.00) 1,492,323.75) 1,268,475.19)
Investment Activities
Investment
(HKD 16,200,000.00)
Salvage Value
HKD
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500,000.00
Net Cash Flow
(HKD 16,200,000.00)
HKD 7,120,262.40
HKD 8,053,915.10
HKD 8,669,003.58
HKD
HKD
9,285,838.09 10,142,049.48
Table 6.1.6 Cash Flow Statement for New Products
According to financial statements listed above, we calculate the Net Present Wealth (NPW), Discounted Payback Period (DPP), and Internal Rate of Return (IRR) for both alternatives.
Criterion
Product 1
Product 2
NPW
HKD 12,122,457.82
HKD 12,133,059.11
DPP
2.8 years
2.2 years
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IRR
37%
42%
Table 6.1.7 Evaluation Criterion
Through Table 6.1.7, it is obvious that the two alternatives have close NPW in year 5. However, relating to DPP and IRR, the Product 2 has a better performance. Hence, our chosen product for the next 5 years is Product 2.
6.2 Bank loan offer and Selection
We approach three different Banks to analyze their loan offer plan. Our loan amount is 16,200,000.00HKD. The three Bank Ltd are the leading private sector commercial banks in Hong Kong. The banks can be described as bank with a steady past, prospering present and promising future.
Advantages: Interest rates: Banks that offer loans do so at competitive rates of interest and on mutually understood and accepted repayment terms, as compared to unconventional lenders.
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Easy availability: Considering that lending institutions like banks must always keep their depositors money working for them and earning more money and interest than it pays out to depositors, bank loans should, in theory, always be available to anyone seeking one. Good lending terms and relations with the bank: If a borrower meets the banks lending criteria to the letter, he could benefit with a lower rate of interest and relaxed and easy repayment terms. Add to this the bonus of having a good working relationship with the bank.
Speed: If the borrower has all the appropriate documentation, any bank can process his application within an hour.
Uses: A borrower can use a bank loan for a number of reasonseither for setting up a business, or to buy home improvement goods or to go on a holiday. In fact, a bank loan is a financial package which helps you tide over a difficult time or set up business or invest in stocks. Considering it is a loan, it means that eventually you will have to pay the bank back within a stipulated time at a predetermined rate of interest.
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No need for collateral:
For a personal loan, a borrower neednt produce any security or collateral. Besides, even the documentation is very little, as compared to other kinds of loans, thereby expediting the processing time.
No need to specify use of the money: In case of a personal loan, one need not spell out what the money is going towards. All a borrower should do is to repay the money in equated monthly installments on or before the stipulated date.
Disadvantages: Borrowers over-borrow: People sometimes over borrow money and get caught in their own debt. Often, this can lead to a shortfall in cash flow and payments can take precedence over income. To prevent this, loan repayments are restricted to a set percentage of a borrowers income.
Prepayment penalty:
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Often, loans come with a prepayment penalty which prevents the borrower from paying the loan earlier than the stipulated date without incurring any extra costs.
Restrictions: Banks levy a number of restrictions on the transaction. This includes having a good credit history before applying for a loan, and there are often restrictions about how the money should be used.
Bank A offer:
Bank B offer:
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Bank C offer:
As the total amount we loan is 16,200,000.00HKD, and we have to compare the loan program provide by these three local banks, as the amount is important and significant to a small company. The loan from Bank A is not profitable, as the interest rate is the
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highest. Even though only 1 percent of extra amount is added to the interest rate, it means a lot to the loan amount as high as millions dollar. So we didnt consider their loan program. The loan from Bank B is acceptable, the payment period is short, but we have to pay more interest. While the Bank C has longer payment period, and the interest we have to pay is less. Therefore the final choice is Bank C.
4 Risk Management
7.1 Break Even Analysis
Break even analysis finds the point where the total revenue is just sufficient to cover the total cost. The break-even point is one of the simplest yet least used analytical tools in management. It helps to provide a dynamic view of the relationships between sales, costs and profits. According to the after-tax net revenue, net salvage value, tax savings from depreciation, PW of capital expenditure and after-tax expenses. We can find the break even point of the analysis.
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Cash inflow:
Net salvage
500000
Revenue:
X(1-0.165)($3999)
3339.165X
3339.165X
3339.165X
3339.165X
3339.165 X
Depreciation credit
0.15(depreciation)
2430000
2065500
1755675
1492324
190271
Cash outflow:
Investment
-16200000
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Variable cost:
-X(1-0.165)($2800)
-2338X
-2338X
-2338X
-2338X
-2338X
Fixed cost:
-(1-0.165)($1600000)
-1336000
-1336000
-1336000
-1336000
-1336000
Net cash flow
-16200000
1001.165X +1094000
1001.165X+ 729500
1001.165X+ 419675
1001.165X +156324
1001.165 X1145729
Table 7.1 Break Even Analysis
We calculate the PWs of cash inflows and outflows as follows.
PW of cash inflows: PW(15%)Inflow=(PW of after-tax net revenue)+(PW of net salvage value)+(PW of tax savings from depreciation)
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=3339.165X*(P/A,15%,5)+500000(P/F,15%,5)+2430000(P/F,15%,1)+2065500 (P/F,15%,2)+1755675 (P/F,15%,3)+1492324 (P/F,15%,4)+190271(P/F,15%,5) =11193.548913X+248600+2113128+1561724.55+1154356.3125+8532584.8632+946 02.7412 =13704996.467+11193.548913X
PW of cash outflows: PW(15%)Outflow=(PW of capital expenditure)+(PW of after-tax expenses) =16200000+(2338X+1336000)*(P/A,15%,5) =16200000+7837.4436X+4478539.2 =7837.4436X+20678539.2
The NPW of cash flows for the BMC is thus PW(15%)=13704996.467+11193.548913X-(7837.4436X+20678539.2) =3356.105313X-6973542.733
PW(15%)=3356.105313X-6973542.733=0 X=2077.8676717884032078
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Through the calculation, we find the demand is about 2077. It means when the sales quantity reach the demand of 2077, the company could get 15% ROR. Then we can forecast the sales quantity based on the break even point.
7.2 Sensitivity Analysis
Sensitivity analysis can glean a sense of the possible outcomes of an investment. For our new product, we select unit price, unit cost, demand, and salvage value as variables to make a sensitivity analysis to determine the effect on the NPW and IRR.
Sensitivity Analysis
Variables -20% -10% 0% 10% 20%
Unit price
IRR
-18%
16%
42%
65%
87%
NPW
(HKD 11,531,385.83)
HKD 300,836.64
HKD 12,133,059.11
HKD 23,965,281.58
HKD 35,797,504.04
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Unit Cost
IRR
68%
55%
42%
27%
11%
NPW
HKD 25,879,622.15
HKD 19,006,340.63
HKD 12,133,059.11
HKD 5,259,777.59
(HKD 1,613,503.93)
Demand
IRR
25%
33%
42%
50%
57%
NPW
HKD 4,339,261.43
HKD 8,236,160.27
HKD 12,133,059.11
HKD 16,029,957.95
HKD 19,926,856.79
Salvage value
IRR
42%
42%
42%
41%
41%
NPW
HKD 12,254,851.39
HKD 12,193,955.25
HKD 12,133,059.11
HKD 12,072,162.97
HKD 12,011,266.83
Table 7.2 Sensitivity Analysis
Figure 7.2.1 Sensitivity Graph of IRR
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Figure 7.2.2 Sensitivity Graph of NPW
Through the sensitivity graphs, for both NPW and IRR we find there is a direct ratio relationship with unit price and demand. On the contrary, as the unit cost increasing, the features will have a dramatic decline. In addition, it is salvage value that almost make no difference on the NPW and IRR.
7.3 Scenario Analysis
Three plausible scenarios assume a set of values for key input variables. We assume some fluctuation of the demand and price. Then calculate the NPW of cash flows..
The worst case: demand drop 45%, price 25% discount X=4400
PW(15%)Inflow=(PW of after-tax net revenue)+(PW of net salvage value)+(PW of tax savings from depreciation)
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=2504.165X*(P/A,15%,5)+450000(P/F,15%,5)+2430000(P/F,15%,1)+2065500 (P/F,15%,2)+1755675(P/F,15%,3)+1492324(P/F,15%,4)+190271(P/F,15%,5) =2504.165X*3.3522+450000*0.4972+2113128+1561724.55+1154356.3125+853258 4.8632+94602.7412 =36935632.4172+223740+2113128+1561724.55+1154356.3125+8532584.8632+946 02.7412 =50615768.884
PW(15%)Outflow=(PW of capital expenditure)+(PW of after-tax expenses) =16200000+(2839X+1586500)*(P/A,15%,5) =2839X*3.3522+1586500*3.3522+16200000 =12491600+21518265.3 =34009865.3
The NPW of cash flows for the BMC is thus PW(15%)=50615768.884-34009865.3=16605903.584
Most-likely case: X=8000
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The NPW of cash flows is thus PW(15%)=13704996.467+11193.548913X-(7837.4436X+20678539.2) =3356.105313X-6973542.733
PW(15%)=19875299.771
The best case: demand increase 30%, price increase 20% X=10400
PW(15%)Inflow=(PW of after-tax net revenue)+(PW of net salvage value)+(PW of tax savings from depreciation) =4007.165X*(P/A,15%,5)+550000(P/F,15%,5)+2430000(P/F,15%,1)+2065500 (P/F,15%,2)+1755675(P/F,15%,3)+1492324(P/F,15%,4)+190271(P/F,15%,5) =4007.165*10400*3.3522+550000*0.4972+2113128+1561724.55+1154356.3125+85 32584.8632+94602.7412 =153431169
PW(15%)Outflow=(PW of capital expenditure)+(PW of after-tax expenses) =16200000+(2004X+1169000)*(P/A,15%,5) =16200000+(2004*10400+1169000)*3.3522
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=89983933.32
The NPW of cash flows is thus PW(15%)=153431169-89983933.32=63447235.68
Variable Considered
Worst Case
Most Likely Case
Best Case
Unit demand
4400
8000
10400
Unit price
HKD2,999
HKD3,999
HKD4,799
Variable cost
HKD3,400
HKD2,800
HKD2,400
Fixed Cost
HKD1,900,000
HKD1,600,000
HKD1,400,000
Salvage value
HKD450,000
HKD500,000
HKD550,000
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PW(15%)
HKD16,605,904
HKD19,875,300
HKD63,447,236
Table 7.3 Scenario Analysis
Through scenario analysis, it displays a marked difference for three types of scenarios. When the demand has a 45% drop and 25% discount of price. The PW(15%) is about 16,605,904 HKD. Nevertheless, when the demand increase 30%, and price increase 20%.There is a big profit. The result is 63,447,236 HKD.
In a word, if a company pursues maximize profit, we should do our best to increase sales and price as well as reduce the fixed cost and variable cost.
7.4 Recommendation
As the company aim to promote a new product, it is important to have a strategic approach to managing supply chain risks and consider the varied and unexpected forms of disruptive events and losses by taking a holistic view of loss sources combined with emerging issues and business considerations for the industry. Meanwhile, because the company only has a 2-year business, lack of capital is
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another facing difficulty. We should speed up the cash flow to maintain adequate committed credit lines and cash balances to ensure sufficient and flexible funding is available to the company.
5 Conclusion
As the report mentioned above, our business operates in good condition with a positive financial structure. Through the promotion of our new product, we believe that we can capture much more market share as well as organizational reputation. Finally, it is feasible that we will come into the GEM and become one of the listed company in Hong Kong after 5 years.
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Project: New Computer Product

City University of Hong Kong

MEEM 6050 Engineering Economic Analysis

Group Project Report

MEEM 6050 Engineering Economic Analysis

Group Project Report

MEEM 6050 Engineering Economic Analysis

Group Project Report

4.1 4.2 4.3 4.4 4.5 4.6 4.7

MEEM 6050 Engineering Economic Analysis

Group Project Report

Alternative Identification, Evaluation and Selection (Computer)....................2

Alternative Products.................................................................................2 Marketing Strategy...................................................................................2

Alternative Identification, Evaluation and Selection (Finance)........................2

Alternative Selection................................................................................2 Bank loan offer and Selection.....................................................................2

7.1 7.2 7.3 7.4

MEEM 6050 Engineering Economic Analysis

Group Project Report

To develop new products to capture market share;

MEEM 6050 Engineering Economic Analysis

Group Project Report

Therefore, we set up four targets:

MEEM 6050 Engineering Economic Analysis

Group Project Report

Net after-tax profit should above 15% of sales income.

MEEM 6050 Engineering Economic Analysis

Group Project Report

4.1 Balance Sheet

MEEM 6050 Engineering Economic Analysis

Group Project Report

8,884 5,732 4,570 359 1,342

11,281 11,894 5,843 484 3,363

T l C rre t L b ota u n ia ilitie s

T l S k old r E u ota toc h e q ity

MEEM 6050 Engineering Economic Analysis

Group Project Report

Table 4.1 Balance Sheet

4.2 Income Statement

MEEM 6050 Engineering Economic Analysis

Group Project Report

Tatal Cost of R evenue Gross Profit

Table 4.2 Income Statement

MEEM 6050 Engineering Economic Analysis

Group Project Report

MEEM 6050 Engineering Economic Analysis

Group Project Report

4.3 Cash Flow Statement

MEEM 6050 Engineering Economic Analysis

Group Project Report

CASH FLOW STATEMENT

N c h prov et as ided by operatingactiv ities

N c h prov et as ided by (used in) financ activ ing ities

N c h us in investingac ities et as ed tiv

MEEM 6050 Engineering Economic Analysis

Group Project Report

Table 4.3 Cash Flow Statement

4.4 Debt Management Analysis

Figure 4.4 Debt management ratios

Debt Management 4.4.1 Debt Ratio

Our companys debt ratios are:

Figure 4.4.1 Debt ratios of the two years

MEEM 6050 Engineering Economic Analysis

Group Project Report