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UTS: Business School
Finance Discipline Group
25742 Financial Management
Case Study Spring Semester 2015
Due: In your lecture during the week commencing 05/10/15 or by 5pm
Monday, 12/10/15 in the box marked ‘FINANCE 2’ in the student lounge
on level 5 in Building 8 (in front of the blue pods), UTS.
Student Surname Student First
Student No. Lecturer
Or day & Time
1.Ngo Thao 12412021 Wed 3-6pm
2. Chhay Joshua 10276374 Thurs 6-9pm
3. Teodoro Rommel 10714398 Wed 3-6pm
4.Lui Yang 11668074 Wed 3-6pm
Item Marks awarded
Spreadsheet – total marks out of 14
Initial cash flows
Annual cash flows
Final year only cash flows
NPV and uncertainty analysis
Spreadsheet easy to read and understand
Executive Summary – total marks out of 6
Aims and objectives
Conclusions and recommendations
Executive summary expressed clearly
TOTAL marks out of 20
All Over Fitness Limited (AOF) is a company that provides fitness equipment for gymnasiums
and fitness organisations in Sydney. Currently, it is considering to open a new office in
Melbourne. The company has considered the initial cost involved, forecasted revenue growth,
and financed the project. Without financial analysis, however, AOF cannot be sure if the new
Melbourne office will bring profits for the company.
Aims and objectives
Our aim is to conduct financial analysis and determine whether or not AOF should take on the
project in Melbourne. This task includes calculating intial cash outlay and annual cash flows
over the life of the project. AOF has already conducted market research and predicted many
metrics. From these, the relevant and necessary information must be identified and used to
calculate annual earnings, a proper discount rate for the project, NPV, and uncertainty of
To make an effective investment decision, the first step is to identify the relevant cash flows
and disregard any irrelevant information. Research cost of $230,000 spent by AOF and
$10,000 expense costs allocated to Melbourne represents sunk costs, thus are not included
in the analysis. An interest expense of $10,050,000; a $10,000,000 loan and payment of
$1,097,946.25 p.a. in principal and interest represent financing costs. They are not relevant
in calculating operating cash flow.
Next, the initial cash outlays associated with launching of the project need to be identified.
This includes $10,080,000 spent on equipment and installation and $450,000 spent on
marketing cost. Training cost for six staff members is $90,000 and brings a 30% tax advantage
of $27,000. Change in net working capital is calculated to be $150,000. The initial cash out
flow totals $(10,743,000).
The third step is to calculate annual cash flows over the life of the project. This includes
transportation costs of $(120,000) p.a. that will be constant for the duration of the project.
Depreciation of machinery over 5 years equals $2,000,000 p.a. Salaries of 3 manufacturing
staff are $225,000, together with salaries of administrative staff $120,000 p.a. and salary of
sales staff of $80,000 p.a., totalling $425,000 p.a. for the life of the project. Revenue increases
from the Melbourne project vary from year to year, while estimated reduced sales in Sydney
is $1,250,000 p.a. Other variable cash flows over the life of the project included electricity and
Additional working capital is calculated by 5% of the following year revenue increase,
represented in the spreadsheet.
The following step is to identify cash flow at the end of the project. This includes sale of
machinery of $850,000, with negative tax effect of the salvage machinery of $255,000.
Together with operating cash flow, the final cash flow is $2,669,375.
The final step is to determine Net Present Value. Because the risk of the project is 100% equity,
we ignore loan interest and payments and only use CAPM to calculate discount rate. Utilising
CAPM with the information provided, the discount rate is 10.28% (4.5% + 0.825*7% = 10.28%).
Using this interest rate to discount annual cash flows, NPV is calculated to be $82,323.46.
To assess the risk of our forecast, we conduct uncertainty analysis using revenue growth rate
and net working capital growth rate as variables. We use Data analysis function in Excel to
test different scenarios. With revenue growth rate and net working capital rate ranging from
1% to 8%, we are able to see how sensitive our predictions are to respective variables.
The initial cash outflow in Year 0 is -$10,743,000. The final cash flow in Year 10 is $2,699,375.
Using CAPM, the appropriate discount rate for the project is 10.28%. The NPV of the project
is $82,323.46. The NPV is positive over the life of the project, thus AOF should accept this
project and open a new office in Melbourne.
Currently, AOF predicts that revenue will increase by 5% from Yr 3-Yr 5. In uncertainty
analysis, we test different scenarios of growth rate from 1% to 8%.
rate 1% 2% 3% 4% 5% 6% 7% 8%
NPV -1,189,368 - 879,512 - 564,311 - 243,715 82,323 413,854 750,925 1,093,585
Here we can see that if revenue growth rate is only 4%, the project’s NPV would decrease
significantly to a negative value. NPV is very sensitive to revenue growth rate and the risk is
high. The spreadsheet includes details of sensitivity analysis for net working capital and
Conclusions and Recommendations
We recommend that All Over Fitness Limited accept the project. The recommendation is
based positive NPV over the project’s life after discounting future cash flows at appropriate
discount rate. AOF also needs to keep in mind that even though NPV is positive, NPV is
sensitive to revenue growth rate and the risk in this forecast is high.
A cost that we believe should be monitored is the increasing electricity charge. Whilst the
revenue is increasing by 5% in Yrs 3-5, the electricity cost increase from year five year 10; by
6.7%. Although this is taking into account the inflation for the period, it is relatively large
increase that should be continually examined. A further profit that could be made by All
Over Fitness Limited is the sale of the old machine equipment at the end of the project (end
of year 10). The expected profit is to be $595,000 after tax.
4. Team Leader Amy Ngo 12412021
Tutor's Name Tutorial time Wed 3-6
Cash Flow at Start Year 0 Year 1 Year 2 Year 3
Training cost for new staff (6) -$90,000
Tax effect of training cost $27,000
Marketing cost -$450,000 10276374 Joshua Chhay
Machinery -$10,000,000 10714398 Rommel Teodoro
Installation -$80,000 11668074 Yang Lui
Net working capital -$150,000
Total year 0 -$10,743,000
Sale growth rate 5%
Cash Flows over the life
Revenue $3,000,000 $4,000,000 $4,200,000
Depreciation (5 yrs) -$2,000,000 -$2,000,000 -$2,000,000
Electricity Costs -$150,000 -$150,000 -$150,000
Marketing Costs -$450,000 -$450,000 -$450,000
Staff wages (75k for 3, 60k for 2, 80k) -$425,000 -$425,000 -$425,000
Reduced sales in Sydney -$1,250,000 -$1,250,000 -$1,250,000
Transport (incl.insurance) -$120,000 -$120,000 -$120,000
EBIT -$1,395,000 -$395,000 -$195,000
Less Tax at 30 % (Tax savings on loss) $418,500 $118,500 $58,500
Depreciation $2,000,000 $2,000,000 $2,000,000
Net working capital -$50,000 -$10,000 -$10,500
Total $973,500 $1,713,500 $1,853,000
Cash Flows at the End
Sale of Machinery
Tax effect on salvage value at 30%
Total tax effect of sale of machinery
Total for year 10
Discount rate 10.28% Accept the project as NPV is positive
Change in Net Working Capital
Growth rate 5%
Year 0 1 2 3
Working capital in 150,000-$ 200,000-$ 210,000-$ 220,500-$
Working capital out 150,000$ 200,000$ 210,000$
Change in NWC 150,000-$ 50,000-$ 10,000-$ 10,500-$