Final Exam

MM 5007
Corporate Finance

Take Home Test

Student Name: Andhika Kautsar

Student ID: 29116520

1st Semester 2017/2018

MASTER OF BUSINESS ADMINISTRATION
School of Business & Management
INSTITUTE TEKNOLOGI BANDUNG
 I. Objective

In early 2016, Mr. Suger Hu, an analyst in the Marketing and Sales Group of the Tongli
Mechanical and Electronic Group Co., Ltd., had to recommend to the division sales manager,
Bruce Kho, the terms under which Tongli would lease one of its advanced systems to
WANDITEX Knitting Factory in Bandung, Indonesia, a highend fashion garment. The CFO of
WANDITEX should Evaluate its current financial condition since WANDITEX is a highly
leverage and marginally profitable company. It gives complicated effects to its financial
condition.

WANDITEX is willing to get an automation system to cut cost and accelerate the
production. This consideration was made after seeing the large backlog orders from the
customers. There are 3 investment opportunities at the moment. One of them is
having automation system.

As the CFO of WANDITEX, an observation and evaluation about any projected

investment is needed to determine projects that are feasible to be invested. So that
things can increase the shareholders wealth to support the CEO decision. The
Objective of The CEO for the company are :
Analyze the best investment opportunity to Increase the Shareholders wealth
Analyze the best way to do the investment opportunity, whether it has to loan or
lease strategy (choose the best option)

II. Analysis
Based on the Companys objective, the CFO should do an observation and evaluation about
the projected to increase the shareholders wealth. The first analyze that the company should
choose the best investment opportunity which are property, automation existing, and marketable
securities. The best choise must the most feasible investment which has a positive NPV and
IRR above the WACC and even beter bellow the after-tax cost debt.
 WACC analysis

Assumptions Source
SIMA PEFINDO Beta Stock :
Beta Stock 71.5% 0.715 http://www.pefindo.com/index.php/fileman/file?file
=15
Risk Premium 4.75% 0.0475 BI Rate

Risk Free of Return 3.13% 0.0313 Risk Premium Indonesia :

http://pages.stern.nyu.edu/~adamodar/New_Hom
e_Page/datafile/ctryprem.html
COST OF EQUITY 6.64%

Asumption Source
COST OF DEBT 13%
Tax 0.25 PPH 21
Cost of Debt After
9.75%
Tax

3.31%
inflation Rate

weighted
Source of Capital weight cost cost
Debt 39% 10% 3.80%
Equity 34% 5.46% 1.91%
WACC 9.02%

According to the analysis, the cost of equity WANDITEX is 6.53% (which are the interest
that the company will pay on its borrowing). Cost of Debt is 13% (which are the interest that the
company wil pay on its debt. And the Value of Wanditex WACC is 9.02%
 After analy the WACC, we should to calculate the investment opportunity from the
company. NPV and IRR should below WACC.

Property Autumation Existing Plan

Year Free Cash Flow PV Free cash Flow Year Free Cash Flow PV Free cash Flow
Investement (10,000,000) Investement (7,550,000)
0 (4,000,000) (4,000,000) 0 (1,690,000) (1,690,000)
1 (6,000,000) (5,503,489) 1 2,270,000 2,270,000
2 4,000,000 3,365,377 2 2,720,000 2,720,000
3 4,800,000 3,704,263 3 3,260,000 3,260,000
4 5,760,000 4,077,274 4 3,910,000 3,910,000
5 6,910,000 4,486,548 5 4,700,000 4,700,000
6 8,290,000 4,937,143 6 5,640,000 5,640,000
7 9,950,000 5,435,395 7 6,760,000 6,760,000
8 11,940,000 5,982,728 8 8,120,000 8,120,000
9 14,330,000 6,586,094 9 9,330,000 9,330,000
10 18,630,000 7,853,830 10 10,270,000 10,270,000

NPV $26,925,163.72 Rp310,985,641,009.81 NPV $47,740,000.00 Rp551,397,000,000.00

IRR 24% IRR 32%

Marketable Securities
Year Free Cash Flow PV Free cash Flow
Investement (1,500,000)
0 1,650,000 1,650,000
1 1,820,000 1,820,000
2 2,000,000 2,000,000
3 0 0
4 0 0
5 0 0
6 0 0
7 0 0
8 0 0
9 0 0
10 0 0

NPV $3,970,000.00 Rp45,853,500,000.00

IRR 102%

Based on the calcutaion and analysis, the most profitable Investment is Automation
Existing Plan, because it has the bigges NPV and IRR Value, and the IRR is bigger than
WACC rate. The company should to consider about purchase Automation Existing Plan as its
Investment.
 Lease or Loan Strategy Analysis
Scenario A B C D
Effective tax rate 25.0% 25.0% 0.0% 0.0%
Pretax cost of debt 10.0% 12.5% 10.0% 12.5%
After-tax cost of debt 7.50% 9.38% 10.00% 12.50%

NPV of loan (borrow-and-buy) $520,810 $504,951 $541,353 $521,848

IRR of loan (borrow-and-buy) 7.50% 9.38% 10.00% 12.50%

Leasing option #1 $168,000 $168,000 $168,000 $168,000

NPV of leasing option #1 548,015.11 530,867.21 525,403.05 504,710.56
IRR of lease 10.52% 10.52% 11.87% 11.87%
Lease advantage over borrowing ($27,205) ($25,917) $15,950 $17,137

Leasing option #2 $176,400 $176,400 $176,400 $176,400

NPV of leasing option #2 575,415.87 557,410.57 551,673.20 529,946.09
IRR of lease 12.20% 12.20% 13.50% 13.50%
Lease advantage over borrowing ($54,606) ($36,601) ($30,863) ($9,136)

Leasing option #3 $184,800 $184,800 $184,800 $184,800

NPV of leasing option #3 602,816.62 583,953.93 577,943.35 555,181.62
IRR of lease 13.89% 13.89% 15.15% 15.15%
Lease advantage over borrowing ($82,007) ($63,144) ($57,134) ($34,372)

Leasing option #4 $193,200 $193,200 $193,200 $193,200

NPV of leasing option #4 630,217.38 610,497.29 604,213.50 580,417.15
IRR of lease 15.61% 15.61% 16.83% 16.83%
Lease advantage over borrowing ($109,408) ($89,688) ($83,404) ($59,607)

Shima Shieki
NPV of loan $871,757 $832,326 $840,395 $811,437
NPV of lease $708,877 $680,959 $554,539 $537,187
IRR of lease 12.93% 12.93% 1.54% 1.54%
Lease advantage over borrowing $162,879 $151,368 $285,856 $274,249

Marui Textile
NPV of loan $824,327 $789,470 $724,721 $704,592
NPV of lease $679,688 $652,919 $531,705 $515,068
IRR of lease 15.09% 15.09% 4.57% 4.57%
Lease advantage over borrowing $144,639 $136,550 $193,016 $189,524
According on the table above, the Tongli leasing Option #1 is the most advantages, but
it still higher than Loan Option that offered by Tongli and the IRR from the Loan option is
more attractive than the whole of Leasing Option. Similar things are also found on Shima and
Marui Loan and Leasing option, those has above value from Tongli Loan Option.
 III. Conclusion and Recommendation
III.I. Conclusion

According to Investment Considering the company has to choose the Automation

System plan for its Company invest,emt, because it hav the biggest NPV value among all
investment. The Biggest NPV value can maximizing shareholderss wealth.

Regarding from Wanditex Option, the whole Leasing Option has IRR value above than
its after tax cost debt. That means the leasing option are not effective cost, and Wanditex
should choose Loan Option. For the company Loan Scenario A is the best choise for
Wanditex company.

III.II. Recommendation
Wanditex company should to Invest in Automation existing plan through the Loan
Strategy.
The best Loan strategy that should be choosed is Leasing Option Scenario A. this
leasing strategy are the best strategy, and it must be giving the company more
advantages.