Finance For Business For Operated Repairing Household Works

Financial Performance

Discuss about the Finance for Business for Operated Repairing Household Works.

A. Emu electronics is the electronic manufacturer previously operated repairing household works. Currently the business is expanded and now known to be a manufacturer of the speciality electronic items. The company is prime seller of smart phone. For the emerging demand of the variety of features of smart phones, Emu electronics spent more into the research and developmental works for upgrading the system and deliver more modified version to their customers. Based on the case scenario and the information, this report has addressed several questions in the first section of the assignment.

The calculation of NPV, payback period, profitability index has been done in the below mentioned table:

Year	Sales (Unit) Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Unit price ($)	Total sales ($)
1	64000	485	31040000
2	106000	485	51410000
3	87000	485	42195000
4	78000	485	37830000
5	54000	485	26190000

Table 1: Total sales calculation

(Source: Created by author)

Calculation of Depreciation	Value($)
Cost of Manufacturing Equipments	34500000
Depreciated over the 7 years life (Straight Line Method)	4928571.429

Table 2: Per year depreciation calculation

(Source: Created by author)

Calculation of Net cash Flow
	Year 1	Year 2	Year 3	Year 4	Year 5
Net Sales	31040000	51410000	42195000	37830000	26190000
Fixed Costs	-5100000	-5100000	-5100000	-5100000	-5100000
Variable Costs	-13120000	-21730000	-17835000	-15990000	-11070000
Total costs	-18220000	-26830000	-22935000	-21090000	-16170000
Profit	12820000	24580000	19260000	16740000	10020000
Less: Depreciation	-4928571	-4928571	-4928571	-4928571	-4928571
EBIT	7891429	19651429	14331429	11811429	5091429
Corporate [email protected]%	2367428.7	5895428.7	4299428.7	3543428.7	1527428.7
EAT	5524000	13756000	10032000	8268000	3564000
Total cash flow (EAT+Dep)	10452571	18684571	14960571	13196571	8492571

Table 3: Calculation of Net cash flow

(Source: Created by author)

Calculation of Net working capital	6208000	10282000	8439000	7566000	5238000
Changes in Working capital		4074000	-1843000	-873000	-2328000

Table 4: changes in working capital over the years

(Source: Created by author)

Year	Cash Flow	Changes in NWC		Cumulative cash flow	Discounted factor (@12%)	Discounted Cash flow
0	-35450000	0	-35450000
1	10452571		10452571	-24997429	0.892857143	9332652.946
2	18684571	-4074000	14610571	-10386857	0.797193878	11647457.99
3	14960571	1843000	16803571	6416714	0.711780248	11960450.14
4	13196571	873000	14069571	20486285	0.635518078	8941466.917
5	8492571	2328000	10820571	31306857	0.567426856	6139882.75
						48021910.74
		Payback period		2.61813392
		IRR		25%
		Profitability index		1.354637821
		NPV		12571910.74

Table 5: Calculation of NPV

(Source: Created by author)

Assessment of sensitivity in accordance NPV to changes in price
It has been assumed that the price of the smart phone has been reduced by 10 %
Year	Sales (Unit)	Unit price ($)	Total sales ($)
1	64000	436.5	27936000
2	106000	436.5	46269000
3	87000	436.5	37975500
4	78000	436.5	34047000
5	54000	436.5	23571000

Table 6 : Revised sales figure after price change

(Source: Created by author)

Calculation of Net cash Flow
	Year 1	Year 2	Year 3	Year 4	Year 5
Net Sales	27936000	46269000	37975500	34047000	23571000
Fixed Costs	-5100000	-5100000	-5100000	-5100000	-5100000
Variable Costs	-13120000	-21730000	-17835000	-15990000	-11070000
Total costs	-18220000	-26830000	-22935000	-21090000	-16170000
Profit	9716000	19439000	15040500	12957000	7401000
Less: Depreciation	-4928571	-4928571	-4928571	-4928571	-4928571
EBIT	4787429	14510429	10111929	8028429	2472429
Corporate [email protected]%	1436228.7	4353128.7	3033578.7	2408528.7	741728.7
EAT	3351200	10157300	7078350	5619900	1730700
Total cash flow (EAT+Dep)	8279771	15085871	12006921	10548471	6659271
Calculation of Net working capital	5587200	9253800	7595100	6809400	4714200
Changes in Working capital		3666600	-1658700	-785700	-2095200

Table: Revised working capital change

(Source: Created by author)

Year	Cash Flow	Changes in NWC		Cumulative cash flow	Discounted factor (@12%)	Discounted Cash flow
0	-35450000		-35450000
1	8279771		8279771	-27170228.7	0.892857143	7392653
2	15085871	-3666600	11419271	-15750957	0.797193878	9103373
3	12006921	1658700	13665621	-2085336	0.711780248	9726919
4	10548471	785700	11334171	9248835	0.635518078	7203071
5	6659271	2095200	8754471	18003307	0.567426856	4967522
						38393538
		Payback period	3
		IRR	15%
		Profitability Index	1.083033521
		NPV	2943538.316

Table 7: Changed NPV calculation considering the Price fluctuation

(Source: created by author)

In the above scenario, the NPV is calculated assuming the 10% reduction in price of the products of the Emu Electronics. In that case, per unit selling price has been changed to $485 to $436.5. Here the NPV is reduced from $12571910.74 to $2943538.316. This is quite evident that the price is highly sensitive. These changes also affect on the profitability index of the business. According to Galvez, Ordieres-Meré and Capuz-Rizo (2015), the sensitivity helps to make understand the overall changes to the assessment of the profitability of the business. In this case scenario, the price reduction has been considered and calculation has been done based on 10 percent price reduction consideration.

Assess sensitivity in accordance NPV to changes in sales
It has been assumed that the sales of the smart phone has been reduced by 16 %
Year	Sales (Unit)	Unit price ($)	Total sales ($)
1	53760	485	26073600
2	89040	485	43184400
3	73080	485	35443800
4	65520	485	31777200
5	45360	485	21999600

Table : Calculation of sales considering the sales reduction

(Source: created by author)

Calculation of Net working capital	5214720	8636880	7088760	6355440	4399920
Changes in Working capital		3422160	-1548120	-733320	-1955520

Table 8 : Changes in working capital

(Source: Created by author)

Year	Cash Flow	Changes in NWC		Cumulative cash flow	Discounted factor (@12%)	Discounted Cash flow
0	-35450000		-35450000
1	6976091		6976091	-28473908.7	0.892857143	6228652.946
2	12926651	-3422160	9504491	-18969417	0.797193878	7576922.274
3	10234731	1548120	11782851	-7186566	0.711780248	8386800.818
4	8959611	733320	9692931	2506365	0.635518078	6160033.074
5	5559291	1955520	7514811	10021177	0.567426856	4264105.747
						32616514.86
		Payback period	4
		IRR	9%
		Profitability Index	0.920070941
		NPV	-2833485.141

Table 9: NPV calculation considering the sales fluctuation

(Source: created by author)

In the above scenario, the entire NPV calculation has been done based on the assumption of the reduction of sales volume by 16 percent. Under this condition, the sales units have been reduced and thus, the net sales amount is also being decreased. Based on the 12 percent discounting factor, the net present value, profitability index, payback period and IRR have been calculated. This is clearly indicated that the net present value of the business is least compared to other two options.

Based on the above three scenarios, this can be concluded that the original condition of the business is the most viable for production of smart phone. Under this scenario, the net present value of Emu Electronics is $12571910.74. On the other hand, the profitability index id the project appraisal technique which ensures the projects viability and the future cash outlay. Under this scenario, the profitability index is the highest i.e., 1.35. This means that the existing condition is the idea financial condition where the maximum return can be achieved by the company. In addition, the interest rate of return evaluates the desirability of the project. In the first scenario, the highest rate of return has been ascertained, thus the company should produce the new smart phone for generating more revenue in the future.

Calculation of Key Financial Metrics

If Emu Electronics losses sales on other models, that does not impacts on the new production of smart phones. Hence, any such variations will not impact on the new smart phone of Emu electronics. Therefore, the changes made in the oil handset do not impact on the net present value of the new production.

Ascertainment the book value of debt and equity for Harvey Norman and Interest rate risk management:

Total debt to equity	2013	2014	2015
Total debt	$820.28m	$707.97m	$698.44m
Less: cash reserves	-$161.66m	-$144.96m	-$185.84m
Net Debt	$658.62m	$563.01m	$512.60m
Total equity	$2.38bn	$2.51bn	$2.58bn
Net debt to equity (%)	27.69%	22.40%	19.88%

Table 10: Ascertainment of book value of equity and debt of Harvey Norman

(Source: Harveynorman.com.au 2016)

In 2015, the total net debt of the Harvey Norman is $512.60m. On the other hand, the total equity of the company in that year is $2.58bn. The total book value of the debt is considered both short term and long term debt of the company while calculating the total debt. On the contrary, the total value of equity has been derived after deducting the preferred equity shares. The book value of debt is useful for determination of the book ratio of the business. However, several researchers have been criticised that it is very difficult to value the debt because this has been varied at times with the figure of the balance sheet. However this above figure gives the clear idea about the company’s net exposure and the overall interest rate over the years.

• Estimation of cost of equity of Harvey Norman:

Consideration of the current price of stock of Harvey Norman:

At present the stock price of the company is $5.34 which is specified in the company website.

• Consideration of the market value of equity and market capitalisation of Harvey and Norman:

The figure of $5.94 is the overall market capitalization of the company.

• Computation of the outstanding shares of Harvey Norman:

Presently, the company has approximately $11126.56 million of shares as outstanding in the capital market.

• Assessment of the current annual dividend paid by Harvey Norman:

The net amount of dividend paid in the present year is $0.17. This reflects the overall “rate of return” which is of 5.65 percent.

• The yield value of government debt in Australia:

This has been evident that the overall risk free government debt is ascertained as 3.25 percent and the value of the yield of the government debt is 1.49 percent

• Computation of the Cost of equity of Harvey Norman by using the model of CAPM:

The above mentioned data attained for the yield of the market for the determination of the cost of capital of Harvey Norman. The below information are as follows:

Risk free rate	3.25%
Market return rate	6.60%
Market value of risk premium	3.35%
Variance	0.000109918
Beta	0.199367955
Covariance between stock and market	2.19142E-05
SD of market	0.010484185
Cost of Equity	3.92%

Table 11: The cost of equity of Harvey Norman

(Source: Created by author)

To ascertain the “weighted average costs of capital” of the company, it is necessary to ascertain the costs of debt. The cost of debt as computed is the book value of the stock, i.e. 11.91 percent. Here the present interest rate is also being considered which is charged at 5.60 percent from Westpac. To take the appropriate decision, the investors need to assess the weighted average costs of capital.

Cost of Equity	3.92%
Interest expenses	32.0822
Book value of Debt	269.459
Market value of cost of debt	5.60%
Book value of Cost of debt	11.91%
Equity	4490.27
Total Capital	4759.729
Debt	269.459
Tax rate	28.88%
WACC on the basis of Book value	4.18%
WACC on the basis of Market value	3.92%

Table 12 : The  Weighted Average Cost of Capital of Harvey Norman

(Source: Created by author)

The pure play method is not efficient for the assessment of the costs of capital because it does not provide the overall costs of capital for HCL. On the other hand, HCL Company does not have the exposure of the diverse business operations which is unlike from Harvey Norman. Hence, the costs of capital may not give any benefit for the computation of the overall “weighted average costs of capital”. 

References:

Galvez, E.A., Ordieres-Meré, J. and Capuz-Rizo, S.F., 2015. Analysis of project duration uncertainty using global sensitivity analysis. The Journal of Modern Project Management, 2(3).

Harveynorman.com.au. (2016). Harvey Norman | Shop Online for Computers, Electrical, Furniture, Bedding, Bathrooms & Flooring | Harvey Norman Australia. [online] Available at: https://Harveynorman.com.au [Accessed 26 Sep. 2016].

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