FINAL PROJECT
Training program:
Master Business Administration
Subject:
Final Project Financial Managment
Send to:
ENEB Business School
Page 1
Contents
Introduction....................................................................................................................3
1. ABC, L.C..................................................................................................................4
2. Derabel, S.A............................................................................................................7
3. MGT,S.A...................................................................................................................9
4. Perfilados S.A......................................................................................................13
Bibliography.............................................................................................................17
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Introduction
This report’s purpose is to conduct specific financial analyses on four unrelated
and distinct businesses: ABC, L.C., Derabel, S.A., MGT, S.A., and Perfilados,
S.A. While a holistic and macroscopic analysis of these entities' activities,
missions, visions, objectives, and profiles is not available, pertinent financial
data are provided for focused analyses, which will be discussed below.
Initial analysis of ABC, L.C. will assess its profitability threshold, breakeven
point, and sales value/turnover corresponding to the calculated profitability
threshold using specific parameters provided. Next, we will analyze
Derabel, S.A. to determine the net cash flows (after taxes) and net absolute
return resulting from the acquisition of a significant tangible asset.
Moving on to MGT, S.A., we will identify its overall financial situation within its
economic sector. This analysis will include an assessment of its indebtedness,
returns, and margins, specifically compared to sector averages. Additionally, we
will analyze the company's decision regarding a large-scale investment by
considering the investment's net present value and actual internal rate of return.
Finally, in the case of Perfilados, S.A., a manufacturer of finished items from raw
materials, we will assess the average storage, manufacturing, sales, and
collection periods. Furthermore, we will consider the company's economic
maturity in relation to its operations.
Background
The company ABC, L.C. manufactures some products with an average sales
price of € 25/unit, with fixed annual costs of € 110,000. The average unit
variable costs are € 5.
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ABC, L.C
Break-Even Analysis involves identifying the precise operational point at which a
business becomes profitable. Its primary objective is to quantitatively determine the
number of units of a product that must be sold at a predetermined price to cover the
company's total production costs. In essence, it provides an answer to the question of at
what sales quantity the total production costs are fully recovered, marking the threshold
of profitability. This crucial milestone must be attained for a company to achieve
profitability. To illustrate this concept visually, refer to the schematic figure below:
Break-even analysis. Cost/Revenue/Profit/Loss
Total Variable Cost = Total Quantity of Output X Variable cost per unit of output
Break-even point in units = Fixed cost
Sales per unit-Variable cost per unit
Average Sales (€) per unit € 25.00.00
Annual fixed cost €110,000.00
Annual Variable Cost per unit € 5.00
Total = €110,000.00
Page 4
BEP= Costs Price- Variable Cost (€ 25- € 5) = 5,500.00 Units
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300,000
(€)SALES
1510220305
3045400
505
500
605
600
705
700
805
80
910
910010510
5 010
010110110
5 210
0 2103
5 153
10
410
410
5 510
0 510
610
0 610
5 710
0 710
5 820
0 820
5 92059
0 2020
020
5 120
0 12002
5 20
220
5 320
0 320
5 420
0 420
5 520
0 520
620
0 62
5
Based on the identification of the BEP at 5,500 units, we now estimate the timeframe
within which A.B.C., L.C. will reach this. Considering an estimated annual sale of 20,000
units and assuming a uniform distribution of sales throughout the year, we can calculate
the average daily sales as follows:
Daily sales= (20,000 sales/ 1 year ) (1 year/365 days) = 54.79 sales/day.
Number of days to achieve 5,500: 5,500 sales/ 54.79 sales day= 100.38 days.
According to the previous analysis, it is determined that A.B.C., L.C. will reach the
break- even point on April 9th or 10th, assuming a starting point of January 1st. This
corresponds to the 100th day of the year, or April 10th in the case of a leap year.
Having established that the sale of 5,500 units achieves the BEP or threshold of
profitability, we can now calculate the sales value associated with this turnover point.
There are two approaches we can take to do this. Firstly, by multiplying the sales
volume required to reach the break-even point with the average sale price per unit,
we can determine the total sales value needed for the company to cover its total costs.
Therefore:
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Sales Turnover = (Sales Volume) (Sales price)/Unit= 5,500 units x € 25/ unit =
€137,500
In the Break-even analysis. Cost/Revenue/Profit/Loss illustrated above, the total fixed
costs are represented as a linear line, remaining constant at €110,000, as provided.
The variable costs, on the other hand, increase linearly in relation to the number of
units sold, with an increment of €5 for each unit sold. The BEP is identified as the
intersection between the red line (representing the sum of fixed and variable costs) and
the blue line (indicating revenue). It is noteworthy that this intersection aligns with our
calculations, indicating the sale of 5,500 units and generating €137,500 in sales.
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Derabel, S.A
The company is currently considering an investment opportunity to buy a new machine
that will enhance its production operations. To assess the profitability of this endeavour,
it is crucial to evaluate the net cash flows after taxes and the net absolute return. We
are provided with certain details, including an initial cost of €200,000 to procure the
fixed asset, an estimated useful lifespan of five years, a maximum operational
capacity of 200,000 units per year, with an initial operational capacity of 70% in the
first year and 100% thereafter.
The unit sales price commences at €2.50 and is subject to an annual increase of 4%.
Additionally, there is a total fixed annual cost of €60,000, which experiences a 2%
annual increase. The unit variable cost amounts to €1.50 and is subject to a 3% annual
increase. These details can be organized in tabular form as follows:
Cash flow analysis
Investment 200.000.00 €
Year 1 2 3 4 5
(70%) (100%) (100%) (100%) (100%)
Unit % capacity
140,000.00 200,000.00 200,000.00 200,000.00 200,000.00
Unit sales price 2.5 1.55 1.59 1.64 1.69
Annual fixed cost 60,000.00 61,200.00 62,424.00 63,672.48 64,945.93
Unit variable cost 1.5 1.55 1.59 1.64 1.69
Annual Variable Cost 210,000.00 309,000.00 318,270.00 327,818.00 337,652.00
Cost 270,000.00 370,200.00 380,694.00 391,490.58 402,597.57
Revenue 350,000.00 520,000.00 540,800.00 562,432.00 584,929.28
Profit before taxes 80,000.00 149,800.00 160,106.00 170,941.42 182,330.71
Asset residual value 0.00 0.00 0.00 0.00 25,000.00
Asset sale value 0.00 0.00 0.00 0.00 30,000.00
Depreciation 35,000.00 35,000.00 35,000.00 35,000.00 35,000.00
Taxable income 45,000.00 115,000.00 125,106.00 135,941.42 152,330.71
Taxes (25%) 0.00 11,250.00 28,700.00 31,276.50 33,985.36
Net Income 80,000.00 138,550.00 131,406.00 139,664.92 148,345.35
Depreciation 35,000.00 35,000.00 35,000.00 35,000.00 35,000.00
Cash flow per year 115,000.00 173,550.00 166,406.00 174,664.92 183,345.35
To allocate the cost of the asset evenly over the five-year lifespan of the project, the
salvage value of the asset (Cost - Residual Value) is calculated. In this case, the
salvage value is €200,000 - €25,000 = €175,000. The depreciation expense for each
year would then be €175,000 / 5 = €35,000.
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It is important to note that taxes are paid in the period following their accrual. Therefore,
taxes accrued in year 1 will be paid in year 2, and so on.
Additionally, depreciation is added back to the net income after tax since the asset
depreciated. This is considered a non-cash transaction, and no cash outflow occurred.
The net cash flows after tax for the mentioned project are presented in the table above,
depicting the annual figures. The cumulative net cash flow amounts to €812,966.27
over the course of the five-year project.
To evaluate the profitability of an investment, one approach is to calculate the net
present value (NPV). The NPV is determined by discounting the future cash flows to
their present value and subtracting the initial investment cost. The formula to
calculate NPV is as follows:
Net Cash Flow for time(NCF), t (in this case, years 1-5) and k represents the
project evaluation rate (provided at 8%).
A positive net present value (NPV) signifies that the net cash inflows exceed the
outflows, indicating a profitable investment. In the case of this endeavour, it is
evident that it would yield a positive NPV.
Furthermore, we can calculate the internal rate of return (IRR), which follows the
same formula as that of NPV.
Page 8
The goal is to determine the rate of return, denoted as "r," at which the cash
inflows from the project precisely match our initial investment. In other words,
we seek the rate that makes the equation as follows:
(r) = 68.39% profitable endeavour for Derabel S.A
MGT,S.A
For MGT, S.A the focus lies specifically on conducting a contextual comparison
based on sector-specific metrics. While we lack information regarding the
company's specific details and its allocated sector, data related to the sector's
liquidity ratio, acid test, debt ratios, sales margins, and investment rotation are
available. These parameters need to be calculated in order to assess MGT,
S.A.'s standing in relation to its sector.
To begin, the liquidity ratio measures a company's ability to meet its short-term
obligations (liabilities) within the next twelve months. It compares the company's
current assets to its current liabilities. A higher liquidity ratio indicates a greater
capacity to fulfill obligations. The acid test, or quick ratio, is a more stringent
metric that assesses the company's ability to meet current obligations but
excludes inventory/stock from its calculation. Additionally, we will analyze the
company's debt ratio, which compares its total debt to its total equity.
Page 9
Based on the information provided, we can derive the following income statement
for the firm:
Total Revenue/Sales: €250,000.00
Cost of Goods Sold (COGS): (€105,000.00)
Net Sales: €145,000.00
Amortization: (€70,000.00)
EBIT (Operating Income): €75,000.00
Interest Expenses: (€9,800.00)
Profit Before Tax: €65,200.00
Tax Expenses: (€16,300.00)
1
Interest calculated on provided interest rates on short- and long-term
liabilities respectively.
Current Assets 45,000+65,000+70,000
Current Ratio = = =6
Current Liabilities 30,000
Current Assets−Stock/Inventory
Quick Ratio (Acid Test) =
=
Current Liabilities
= 4.5
Total Liabilities 105,000+65,000+30,000
Debt Ratio = = = 1.3
Total Equity 150,000
To facilitate a comprehensive comparison of profitability, we will proceed to
calculate various economic and financial returns, along with margin on sales and
investment rotation. These metrics will provide further insights into the financial
performance and efficiency of the company.
Return on Assets (ROA) - A measure of the ability of company assets to
generate returns.
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EBIT 75,000
ROA = = = 21.4%
Total Assets 350,000
Return on Equity (ROE) – A measure of the ability of the company’s to
effectively use its equity to generate profits.
NOPAT 48,900
ROE = Shareholder' s Equity =
150,000 = 32.6%
Return on Sales (ROS) – This is effectively the company’s profit margin or
commercial margin, and more precisely is an indicator of how effectively a
company’s sales influence the company’s profits.
EBIT 75,000
ROS = = = = 51.7%
Net Sales 145,000
The Investment Turnover Ratio, also known as Investment Rotation, is a metric
that measures a company's ability to generate revenue using the capital
invested in it, which encompasses its debts and shareholder equity.
According to the general accounting equation, Assets = Liabilities +
Shareholder's Equity. Therefore, the capital invested in the company
corresponds to its assets, and its revenues are correlated to net sales. Thus,
the calculation of the Investment Turnover Ratio is as follows:
NetSales Net Sales
Investment Turnover = Total Liabilities + Total Shareholder' s Equity =
Total Assets =
= = 0.41
In summary, with the sector metrics provided and the corresponding business
metrics that have been calculated, we can compile the results in a tabular format
for convenient comparison.
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Comparison Metrics | Company | Sector
Liquidity Ratio | 6 | 1.55
Acid Test (Quick Ratio) | 4.5 | 1.2
Debt Ratio | 1.3 | 1.2
Economic Profitability (ROI) | 21.4% | 23%
Financial Profitability (ROE) | 32.6% | 29%
Margin on Sales (ROS) |
Investment Rotation/Turnover | |
In an alternate scenario, we have a proposed project with a duration of three
years, necessitating an initial capital investment of €2,500,000. The projected
net cash flows for each year are as follows: €1,500,000 for year 1,
€3,700,000 for year 2, and €4,100,000 for year 3. We need to determine the
Net Present Value (NPV) and the Internal Rate of Return (IRR) of this
investment.
Considering a 3% rate of inflation and a minimum expected investment return of
8%, we can employ the formulas and calculations outlined earlier to determine
these metrics. The Net Present Value is calculated using the formula:
k will represent the combined minimum investment return with inflation (8%
+3%=11%):
NPV=€4,817,145.26
Internal Rate of Return calculation:
Option1:
Option2:
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Page 13
Perfilados S.A
Our current task is to evaluate the overall business life cycle of Perfilados, S.A.
Specifically, we are required to assess the Average Maturity Period, which
represents the average time it takes for raw materials to be transformed into
finished goods and sold. To determine the overall maturity period, we will
calculate various sub-stages individually. These sub-stages include:
Average Procurement Period: This refers to the average time between the
investment in raw materials and their incorporation into the business cycle.
Average Manufacturing Period: This represents the average duration between
the incorporation of raw materials and the production of finished goods for sale.
Average Sales Period: This signifies the average time between the completion
of production and the readiness of goods for selling.
Average Collections Period: This indicates the average duration between the
sale of finished goods and the receipt of payment/remuneration.
Average Payment Period: This represents the average time between the
acquisition of raw materials from suppliers and the issuance of payment.
The table below summarizes the relevant figures provided for Perfilados, S.A:
Metric | Value
Annual Cost of Raw Materials (€) | 105,000
Average Raw Material Stock (€) | 9,250
Annual Cost of Production (€) | 198,000
Average Value of Products Under Development (€) | 11,000
Average Value of Finished Products Stored (€) | 18,500
Annual Sales of Finished Product (€) | 290,000
Average Consumer Debt (€) | 17,000
Analysing these figures, we can calculate the respective sub-stages and
determine the overall maturity period of Perfilados, S.A.
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AnnualCost of Raw Materials 105,000
Storage Turnover = = = 11.35 annually
Raw Materials average stock 9,250
Average Storage (Procurement) Period= 365 = 32.2 days
11.35
Annual Cost of Production 198,000
Production Turnover = = = 18
AverageValueof Products Under Development 11,000
Product
Products
*Please note that the Annual Sales of Finished Product is stated as the cost
price and, therefore, is equal to the Annual Cost of Production. This assumption
is made under the consideration that the company has sold all of its annual
production.
Annual Sales of Finished Product 290.000
Collections Turnover = = = 17.1
annually AverageConsumer Debt
17,000
Calculating the average procurement, manufacturing, sales, and collections
periods, we can now combine them to obtain the overall period of economic
maturity, known as the Average Period.
Economic Maturity = 32.2 + 20.3 + 34.1 + 21.3 = 107.9 days
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Investment.
We are presented with a company that is considering a short-term investment.
The investment requires an initial capital infusion of €2,000,000, and projected
annual cash inflows and outflows for a four-year period are summarized in the
table below:
*rep in €
Years Collection Payments Net cash flow
1 4,500,000.00 3,800,000.00 700,000.00
2 5,500,000.00 4,500,000.00 1,000,000.00
3 6,000,000.00 5,000,000.00 1,000,000.00
4 4,000,000.00 3,200,000.00 800,000.00
Dorset
IRR = 26.08%
Since the internal rate of return for the projected cash flows is 26.08%, it is
crucial for the viability of this investment project that the financing rate of
borrowed funds is lower than this percentage. If the interest rate on financing
exceeds 26.08%, the investment project, despite projecting positive net cash
flows year over year, would not be ultimately profitable. This can be further
substantiated by calculating the Net Present Value (NPV) using a discount rate
(k) of 26.08%:
Based on the negative NPV in relation to a €2,000,000 investment and a
nominal discount rate of 26.08%, it is evident that the investment is not
profitable. In fact, for the investment to become profitable, the rate needs to be
significantly lower than the internal rate of return of 26.08%. We can
visualize the relationship between the NPV and the nominal discount rate
(k) graphically, which demonstrates the concept that as the nominal
discount rate decreases, the profitability, as measured by the net present
value, increases. This relationship is both intuitive and mathematically validated.
Page 16
NPV as a function of Various
Page 17
Bibliography
Schmidt, J. (2023). Break Even Analysis. Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/accounting/break-even-analysis/
Corporate Finance Institute (Financial Ratios eBook).
https://corporatefinanceinstitute.com/resources/ebooks
Management Consulted https://managementconsulted.com/break-even-
analysis/
Alexander, D., & Nobes, C. Financial Accounting. An International Introduction.
(2nd Edition). Pearson Education.
Figure 1. Break-even point graph. (n.d.). ResearchGate.
https://www.researchgate.net/figure/Break-even-point-graph_fig1_256325920
financial management (2023) eneb.pdf
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