Pro Tech Pvt. ltdGroup 1 Section 2:• Javed Haider 2013-02-0109• Maliha Khan 2013-02-0247• Mehreen Seher Hai 2013-02-0059• Muhammad Wajih Haider 2013-02-0247• Salik Nazimuddin Chaturbhai 2013-02-0183• Salman Farooq 2013-02-0186

INTRODUCTION

Executive Summary

• Main aim: to cater to the growing local demand of computers by domestic and corporate users.

• Services offered: maintenance, software upgrades.

• Research comprises of similar enterprises.

• Feasible investment considering the gap in supply and demand of support services and affordable computers.

• Initial investment = PKR 15 million of which PKR 3 million is loan.

Industry Analysis The business will be prone to fluctuations in global and

local economic movements. The industry drivers are discussed below:

• Exchange Rates: One of our main cost drivers since products are being imported from abroad mainly the US.

• Government Policy: Import duties and tariffs may affect profitability and pricing decisions.

• Political Instability: An instable environment will lead to decrease in demand and thus revenue.

• Inflation: Both domestic and international inflation will affect our business.

• Interest Rates and Sales Tax: High sales tax will increase prices and high interest rates will discourage investment affecting our demand.

Assumptions

ɕ Constant owner’s equityɕ Projected inflation figures from IMF

dataɕ Unit costs from primary market

research. ɕ Averaged out and marked up

(increasingly every year) to obtain SPɕ Growth rate constant at 10%ɕ Depreciation – Straight Line Method

FINANCIAL STATEMENTS

RATIO ANALYSIS

Profitability: • Found to be reasonable due to

ratios below:• Gross Profit/ Net Profit Margins

increase steadily, due to steady increase in sales and constant expenses.

• Return on Capital Employed and Return on Equity both increase at acceleration, due to constant equity and decreasing debt.

Year

1

Year

3

Year

50

20

40

60

80

100

120

NP MarginReturn on CEReturn on Equity

Liquidity:• Found to be quite high, as

proven by:• Current/Acid test ratios almost

constant and above 2, which is very liquid but perhaps too much. (wastage)

• Net Working Capital to Total Assets increases, as liquidity within our assets increases due to constant F.A. and increasing cash flow and inventory.

Year

1

Year

2

Year

3

Year

4

Year

50%

20%

40%

60%

80%

100%

FANWC

Efficiency:• Increases over time, as:• Debt is repaid – Debt to

Equity ratio decreases.• Fixed Asset turnover

increases and we earn more reveue on all assets invested.

Year

1

Year

3

Year

5

02000000400000060000008000000

100000001200000014000000

Debt

DebtSeries2FA

Investment Ratios:• Healthy investment

related activities:• Increasing profit earned

on inv – as EPS and DPS increase.

• Financial obligations can easily be met. dividend cover and interest cover both high.

year

1

year

2

year

3

year

4

year

5

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

InterestInterestDividendNet Profit

Others:• % change in sales is nearly constant,

due to growth and markup.• % change in profit is a lot at start

and then becomes normal, thus affecting degree of operating leverage.

• Payout ratio shows we start paying dividend once we’re out of breakeven phase and into profit making phase.

WACC

Calculation of WACC

• WACC was 17.828• Cost of equity was computed by

taking a market rate of return of 31 % , an equity risk premium of 6.36

• Cost of loan was 18%

WACC= (Cost of equity) * 0.8 + 18*0.2*0.65

• = 17.828

SENSITIVITY ANALYSIS

Sensitivity Analysis

• 5 key variables • All increased and decreased by 25%Internal Factors• Mark up• Rate of miscellaneous expenses

External Factors• Inflation• Growth rate• Exchange rate

External Factors

Inflation Rate

• An increase from 8% to 10%-NPV increased by 66.28%-Net profit increased by up to 9%-IRR increased from 21% to 23%

• A decrease from 8% to 6%-NPV fell by 63.5%-Net profit fell by up to 9%-IRR decreased from 21% to 19%

The reason for such results is that the business adds a certain mark up on costs, thus as costs increase, with demand held constant, our sales will increase.

Industry Growth Rate

• An Increase from 10% to 12.5%-NPV increased by 60.7%-Net profit increased by up to 9.33%-IRR increased from 21% to 23%

• A decrease from 10% to 7.5%-NPV fell by 59.7%-Net profit fell by up to 8.9%-IRR decreased from 21% to 19%

Exchange Rate

• Revalued by 25%-NPV increased by 1574.38 %-Net profits increased by 141% in the last year(5th) of forecasts-IRR increased from 21% to 65%

• Devaluation by 25%-NPV fell by 2068% and turned negative-Profits turned into losses-IRR would have to be extremely low for the project to be

feasible

The business will have to reduce its reliance on imported goods or it should sign future exchange rate contracts to avoid the risk of such variances in its forecasts

Internal Factors

Mark up

• An increase by 25%-NPV increased by 329%-Net profit increased by up to 34% in the last year of forecasts-IRR increased from 21% to 31%

• A decrease by 25%-NPV fell by 355% and turned negative-Net profit fell by up to 34% in the last year of forecasts-IRR decreased from 21% to 9%

Miscellaneous Expenses

• An Increase from 1% to 1.25%-NPV fell by 21%-Net profits fell by 2 to 4%-IRR decreased from 21% to 20%

• A decrease from 1% to 0.75%-NPV increased by 20%-Net profit increased by 2 to 4%-IRR increased from 21% to 22%

Though the miscellaneous account for only a minor part pf the expenses, their impact on the NPV is quite significant.

SCENARIO ANALYSIS

Scenario 1

What if the a law is passed to ban the import of used computers.

Changes due to the policy:-• Increase in demand• Increase in our mark-up• Increase in Inventory• Hiring more labour

This means consumers of imported used computers shift to alternatives.

This results into an increase in profits although we are increasing our costs but the Increase in demand is higher.

Scenario 2We assume that United States of America intervene in our war againstTerrorism in Waziristan

How our business is affected• Huge decline in demand• Increase in prices due to depreciation in exchange rate• Will decrease Inventory• Ask some staff to leave• Decrease advertising cost• Decrease markup

This results in our business making a loss for first two years and after the 3rd yeardo we make some profits.

NPV AND BREAKEVEN ANALYSIS

  initial 2010 2011 2012 2013 2014

         

Cash flows (15,000,000.00) 3,357,872.58 3,016,547.26 4,754,285.34 7,928,151.26 10,010,083.42

Average Cashflow

$4,777,992.77 $4,777,992.77 $4,777,992.77 $4,777,992.77 $4,777,992.77

Difference(1,420,120.19) (1,761,445.51) (23,707.42) 3,150,158.49 5,232,090.65

• Initial years, 2010 and 2011, show a negative divergence between required and actual cash flows

• In 2012 the actual cash flow almost equals the required cash flow

• Years 2013 and 2014 show cash flows exceeding the required level

This can be primarily attributed to a higher level of sales and increased margins in the later years

CONCLUSION

Conclusion and Future Prospects• Feasibility of project can be

attributed to existence of growing demand, considering reliable data has been used.

• We plan to expand operations in Lahore and other cities, explore possibility of increasing margins and maintaining demand.

• Moreover, additional facilities such as networking and used computers will be provided.

• We can reduce dividends to fulfill our financing needs.

References

• The ministry of information technology has been asked to draft a proposal for a ban on the import of used computers and IT accessories.” (Dawn Front page article, 6 March 2010).

• 2009: Macro, Politics and the Market. Pakistan Strategy Report December 2009. JS Global Capital limited

• Stock market investors make 31pc gains in 10 years. Erum Zaidi. The Nation. April 29 2010.

• Estimating the Equity Risk Premium for Economies in the Asian Region. Michael B Cohen. Asian Journal of Accounting and Finance. 2009. Vol 1 No.1 .Web.

QUESTIONS