+ All Categories
Transcript
  • 8/2/2019 6050 Group Project Report v4.0

    1/57

    Project: New Computer

    Product

    City University of Hong Kong

    Department of System Engineering and Engineering

    Management

    MEEM 6050 Engineering Economic Analysis (Semester A,

    2011-12)

  • 8/2/2019 6050 Group Project Report v4.0

    2/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Student Name Student number

    LU Shan 52541490

    LI Xi 52410662

    XU Sha 51982297

    CHEN Pengyu 52472302

    YAO Mo 52467562

    REN Yanling 52302337

    2 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    3/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Abstract

    The company depends on their current finance situation to set objectives to make our

    company as one of the listed companies in Hong Kong. To achieve this aim, our

    company designs two types of PC products. According to break-even analysis,

    sensitivity analysis and scenario analysis, we find the break-even point of demand and

    the different IRR of two products. To make the best profits, we choose product two

    eventually.

    3 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    4/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Table of Contents

    1 Introduction...........................................................................................................2

    2 Problem Definition................................................................................................2

    3 Setting Objectives..................................................................................................2

    4 Financial Statements.............................................................................................2

    4.1 Balance Sheet.........................................................................................2

    4.2 Income Statement....................................................................................2

    4.3 Cash Flow Statement................................................................................2

    4.4 Debt Management Analysis........................................................................2

    4.5 Liquidity Analysis....................................................................................2

    4.6 Asset Management Analysis.......................................................................2

    4.7 Profitability Analysis................................................................................2

    4 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    5/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    5 Alternative Identification, Evaluation and Selection (Computer)....................2

    5.1 Alternative Products.................................................................................2

    5.2 Marketing Strategy...................................................................................2

    6 Alternative Identification, Evaluation and Selection (Finance)........................2

    6.1 Alternative Selection................................................................................2

    6.2 Bank loan offer and Selection.....................................................................2

    7 Risk Management..................................................................................................2

    7.1 Break Even Analysis.................................................................................2

    7.2 Sensitivity Analysis..................................................................................2

    7.3 Scenario Analysis....................................................................................2

    7.4 Recommendation.....................................................................................2

    8 Conclusion..............................................................................................................2

    Conclusion

    5 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    6/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    1 Introduction

    Ocean is a computer manufacturing company, established by LU Shan, XU Sha, LI

    Xi, REN Yanling, YAO Mo, and CHEN Pengyu in November 2009. Headquartered in

    Hong Kong, the company has a production factory, in which have totally 5

    departments and 100 workers. The objective of our company is to become one of

    listed companies in Hong Kong after 5 years. We want to attract some external

    investors to invest our business, and the proposal of our company development as

    follows.

    2 Problem Definition

    Based on Hong Kong business circumstance nowadays, the competitive situation is

    much harsh than the previous one we understood, especially for computer and

    electronic industries. For long-term development to achieve the organizational goals,

    we are facing following problems:

    To develop new products to capture market share;

    Lack of initial capital for the new products R&D and manufacture.

    6 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    7/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    1 Setting Objectives

    As mentioned above, we have the aim and mission to fulfill. There is no doubt that,

    Hong Kong is a perfect place to start up an industry, even several economic crisis still

    leaves impacts on the financial market. We already have factory plant, manufacturing

    line, material and component supplier, and human resources, both engineers and

    salesman included. Thus, we definitely have the plan to develop a brand new product

    that can take over percentages of computer market, and establish a sustainable

    developed company image in the long run.

    Our aim is to make our company as one of the listed companies in Hong Kong. As

    Hong Kong market has long history, it has high requirement and reputation to the

    candidate companies. If we want to be the listed company, several requirements and

    objects we have to fulfill at one, before we enjoy the benefit from Hong Kong stock

    market, such as credit extending.

    Therefore, we set up four targets:

    Net income of the first year should above 2 million HKD;

    Total income of three years should above 5 million HKD;

    Gross margin should above 25% or more;

    7 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    8/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Net after-tax profit should above 15% of sales income.

    1 Financial Statements

    As it is a 2-year running company, first and foremost, we tend to show the financial

    statements of past 2 years and give a brief analysis for our financial status.

    8 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    9/57

  • 8/2/2019 6050 Group Project Report v4.0

    10/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    in HK dollars (000)Period Ending year 1 year 2

    Assets

    Current Assets

    Cash And Cash Equivalents 8,884 11,281

    Short-Term Investments 5,732 11,894

    Net Receivables 4,570 5,843

    Inventories 359 484

    Other Current Assets 1,342 3,363

    Total Current Assets 20887 32865Long-Term Investments

    Property Plant and Equipment 1,739 2,332

    Goodwill 36 197Intangible Assets 363 334

    Accumulated Amortization

    Other Assets 998 609

    Deferred Long-Term Assets Charges 84 1,166

    Total Asset 24,107 37,503

    Liabilities

    Current Liablities

    Accounts Payable 6,019 9,568

    Short/Current Long-Term Debt

    Other Current Liabilities 3,568 6,921

    Total Current Liabilities 9,587 16,489Long-Term Debt

    Other Liabilities 798 985

    Deferred Long-Term Liability Charges 5,026 6,952

    Minority Interest

    Negative Goodwill

    Total Liablities 15,411 24,426Stockhoders' Equity

    Preferred Stock

    Common Stock 5100 6818

    Retained Earnings 8646 13153

    Treasury Stock

    Capital Surplus

    Other Stockhoder Equity 60 7.6

    Total Stockholder Equity 13806 19978.6

    BALANCE SHEET

    10 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    11/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Table 4.1 Balance Sheet

    4.2 Income Statement

    11 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    12/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    in HK dollars (000)

    Period Ending year 1 year 2

    Total Revenue 22,806 30,855Cost of Revenue

    Direct labor4,120 5,572

    Material 3,568 4,765

    Overhead 3,335 4,230

    Depreciation 4,036 5,700

    Tatal Cost of Revenue 15,059 20,267

    Gross Profit 7,746 10,588Operiating Expenses

    Research Development 1,503 1,054

    Selling Generaland Administrative 2,815 3,573

    Operating Income or Loss 3,428 5,961Income from Continuing Operations

    Total Other Income/Expenses Net 569 589

    Earning Before Interest And Taxes 3,997 6,550Interest Expense 0 0

    Income Before Tax 3,997 6,550

    Income Tax Expense 660 1,081

    Minority Interest - -

    Net Income 3,337 5,469

    INCOME STATEMENT

    Table 4.2 Income Statement

    12 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    13/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    13 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    14/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    4.3 Cash Flow Statement

    14 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    15/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    in HK dollars(000)

    Period Ending year 1 year 2

    Cash flows fromoperatingactivities

    Net income 3337 5469

    Items not requiring an outlay of cash:

    Depreciation, Depletion & Amortization 301 450

    Depreciation and Depletion 237 345

    Amortization of Intangible Assets 64 105

    Deferred Taxes & Investment Tax Credit 74 -350

    Deferred income taxes 74 -350

    Investment Tax Credit 0 0

    Stock-based compensation

    Other Funds 241 511

    Net changes in working captial items 1264 3914

    Net cash provided by operatingactivities 5217 9994Cash flows fromfinancingactivities

    Cash Dividends Paid - Total 0 0

    Common Dividends 0 0

    Preferred Dividends 0 0

    Change in Capital Stock 344 341

    Repurchase of Common & Preferred Stk. -3 -118

    Sale of Common & Preferred Stock 347 459

    Proceeds from Stock Options 0 0

    Other Proceeds from Sale of Stock 347 347

    Issuance/Reduction of Debt, Net 0 0

    Change in Current Debt 0 0

    Change in Long-Term Debt 0 0Issuance of Long-TermDebt 0 0

    Reduction in Long-Term Debt 0 0

    Other Funds 358 719

    Other Uses 0 0

    Other Sources 358 719

    Net cash provided by (used in) financingactivities 702 1060Cash folws frominvestingactivities

    Capital Expenditures -936 -1139

    Capital Expenditures (Fixed Assets) -698 -1036

    Capital Expenditures (Other Assets) -238 -103

    Net Assets from Acquisitions 0 -209

    Sale of Fixed Assets & Businesses 0 0

    Purchase/Sale of Investments -2204 -6422

    Purchase of Investments -11153 -21850

    Sale/Maturity of Investments 8949 15428

    Other Uses 0 -10Other Sources 47 0

    Net cash used in investingactivities -3093 -7780Miscellaneous Funds 0 0

    Net Change in Cash 2812 2394

    Free Cash Flow 4503 8085

    CASH FLOW STATEMENT

    15 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    16/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Table 4.3 Cash Flow Statement

    4.4 Debt Management Analysis

    Figure 4.4 Debt management ratios

    4.4.1 Debt Ratio

    Our companys debt ratios are:

    Year 1 Debt ratio=Total debtTatal assets=$15411$24107=63.93%

    Year 2 Debt ratio=Total debtTatal assets=$24426$37503=65.13%

    Figure 4.4.1 Debt ratios of the two years

    Because of a debt ratio of greater than 1 indicates that a company has more debt than

    assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets

    than debt. As we can see from the consequence, our companys debt ratio less than 1,

    which means our firm has lower investment risk.

    1.4.2 Time-Interest-Earned Ratio

    16 / 57

    Debt ManagementRatios that show a firm usedebt financing and its abilityto meet debt repaymentobligations.

  • 8/2/2019 6050 Group Project Report v4.0

    17/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Times Interest Earned or Interest Coverage is a great tool when measuring a

    company's ability to meet its debt obligations. This ratio by dividing earnings before

    interest and income taxes (EBIT) by the yearly interest charges that must be met.

    However, because of our company do not have long-term debt, so we do not have

    interest expense at this time, which contribute to the times-interest-earned ratio is not

    defined.

    4.5 Liquidity Analysis

    Figure 4.5 Ratios related to liquidity analysis

    The excess of current assets over current liabilities is known as working capital, a

    figure that indicates the extent to which current assets can be converted to cash to

    meet current obligations. Therefore, a firms net working capital as a measure of its

    liquidity position. In general, the larger the working capital, the better able the

    business is to pay its debt.

    4.5.1 Current Ratio

    17 / 57

    Liquidity AnalysisRatios that show therelationship of a firms cashand other assets to itscurrent liabilities

  • 8/2/2019 6050 Group Project Report v4.0

    18/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    We calculate the current ratio by dividing current assets by current liabilities, and our

    companys current ratios are:

    Year 1 Current ratio=Current assetsCurrent liabilities=$20887$9587=2.18

    times

    Year 2 Current ratio=Current assetsCurrent liabilities=$32865$16489=1.99

    times

    Figure 4.5.1 Current ratios of the two years

    The ratio is mainly used to give an idea of the company's ability to pay back its short-

    term liabilities (debt and payables) with its short-term assets (cash, inventory, and

    receivables). The higher the current ratio, the more capable the company is of paying

    its obligations. A ratio under 1 suggests that the company would be unable to pay off

    its obligations if they came due at that point. We can conclude that our company is in

    good financial health, because of our current ratios are both higher than 1 in the two

    years.

    4.5.2 Quick (Acid- Test) Ratio

    We calculate the quick ratio by deducting inventories from current assets and then

    dividing the remainder by current liabilities.

    18 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    19/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Our companys Quick ratios are:

    Year 1 Quick ratios=Current assets-InventoriesCurrent liabilities=$20887-

    $359$9587=2.14 times

    Year 2 Quick ratios=Current assets-InventoriesCurrent liabilities=$32865-

    $484$16489=1.96 times

    Figure 4.5.2 Quick ratios of the two years

    The quick ratio measures how well a company can meet its obligations without

    having to liquidate or depend too heavily on its inventory. Inventories are typically the

    least liquid of a firms current assets; hence, they are the assets on which losses are

    most likely to occur in case of liquidation. The higher the quick ratio is, the better the

    position of the company. The quick ratios of our company tell us we could pay all of

    our current liabilities if they came due immediately

    4.6 Asset Management Analysis

    Figure 4.6 Ratios related to asset management

    19 / 57

    Asset ManagementA set of ratios whichmeasure how effectively afirm is managing its assets

  • 8/2/2019 6050 Group Project Report v4.0

    20/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    4.6.1 Inventory Turnover

    Inventory turnover ratio shows how many times a company's inventory is sold and

    replaced over a period. The days in the period can then be divided by the inventory

    turnover formula to calculate the days it takes to sell the inventory on hand or

    "inventory turnover days".

    Inventory Turnover Ratio=entoryaverageinv

    sales , and our companys Inventory turnover

    ratios are:

    Year1 ITR1= sales

    Average Invent= $22806

    $359

    =63.53 times

    Year2 ITR2= sales

    Aver age I nvent= $30855

    $484

    =63.75 times

    ITR2>ITR1, it means our company has good liquidity and the better ability of turning

    inventory into cash or accounts receivable in year 2.

    20 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    21/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    4.6.2 Days Sales Outstanding

    This ratio is a measure of the average number of days that a company takes to collect

    revenue after a sale has been made. A low DSO number means that it takes a company

    fewer days to collect its accounts receivable. A high DSO number shows that a

    company is selling its product to customers on credit and taking longer to collect

    money.

    The formula is DSO=

    365

    sannualsale

    ceivableRe, and our companys DSO ratios are:

    Year1 DSO1=

    365

    22806

    4570

    365

    sannualsale

    ceivableRe= =73.14

    Year 2 DSO2=

    365

    30855

    5843

    365

    sannualsale

    ceivableRe=

    =69.12

    The result is DSO1>DSO2, it means our company in year2 has the chance to put the

    cash to use again through quickly turning sales into cash.

    21 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    22/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    4.6.3 Total Assets Turnover

    Total Asset Turnover Ratio measures a firm's efficiency at using its assets in

    generating sales or revenue - the higher the number the better.

    Total Asset Turnover Ratio=

    sTotalAsset

    Netsales

    Year 1 TATR1=

    24107

    22806

    sTotalAsset

    Netsales=

    =0.95

    Year2 TATR2=

    37503

    30855

    sTotalAsset

    Netsales=

    =0.82

    We can see TATR1>TATR2, it means our company in year 2 is generating a sufficient

    volume of business for the size of our asset investment.

    4.7 Profitability Analysis

    22 / 57

    Profitability AnalysisA set of ratios which showthe combined effects of

    liquidity, assetmanagement, and debt onoperating results

  • 8/2/2019 6050 Group Project Report v4.0

    23/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Figure 4.7 Ratios related to profitability analysis

    4.7.1 Profit Margin on Sales

    Net Margin Ratio illustrates what percentage of each sales dollar is retained in

    earnings.

    Year 1 Net Margin Ratio1=

    22806

    3337

    NetSales

    ($)NetIncome=

    =14.6%

    Year 2 Net Margin Ratio2=

    30855

    5469

    NetSales

    ($)NetIncome=

    =17.7%

    Net Margin Ratio2>Net Margin Ratio1, it means our company converting sales into

    profits after all expenses are subtracted out is better in year 2 than in year 1.

    4.7.2 Return on Total Assets

    The return on total assets is a ratio that measures a company's earnings before interest

    and taxes (EBIT) against its total net assets. The ratio is considered an indicator of

    how effectively a company is using its assets to generate earnings before contractual

    obligations must be paid.

    The formula of this ratio is:

    23 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    24/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    ROTA=

    setsTotalNetAs

    TaxespenseInterestExNetIncome

    setsTotalNetAs

    EBIT ++=

    And our firms ratios are:

    Year 1 ROTA1=24107

    6603337+ =0.166

    Year2 ROTA2=37503

    10815469+ =0.175

    ROTA2>ROTA1, it indicates that our company in year 2 is more effectively to be

    using its assets.

    4.7.3 Return on Common Equity

    The amount of net income returned as a percentage of shareholders equity. Return on

    equity measures a corporation's profitability by revealing how much profit a company

    generates with the money shareholders have invested.

    The formula is ROE=Equitysr'Shareholde

    NetIncome

    24 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    25/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Year 1 ROE1=Equitysr'Shareholde

    NetIncome =13806

    3337 =24.2%

    Year 2 ROE2=

    Equitysr'Shareholde

    NetIncome =

    6.19978

    5469 =27.4%

    Because of ROE2>ROE1, it indicates that the shareholders are earning more money in

    year 2 on their shares.

    5Alternative Identification, Evaluation andSelection (Computer)

    5.1 Alternative Products

    In order to fulfill our target, we plan to invest new computers. After careful

    examination, we find out that to invest and develop a new product with our own brand

    is much better and profitable than pure manufacturing or designing for other

    company. As we already run a computer manufacturing industry for two years, and we

    have excellent and experienced designing, testing, quality assurance engineers, that is

    to say we have already built an entire group to develop and function a brand new

    product. Besides that, we have hired two new engineers who graduate from top

    25 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    26/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    universities in United States, and they bring back the latest technology that can be

    applied to our designing phase and manufacturing phase.

    Figure 5.1 Sales Forecast for PC and Tablet

    Before research and design phase, we have study the PC market report these years.

    We can see that, with coming of information era, people gain more and more need to

    have a own personal especially portable computer to process data at anywhere ant

    time. Since the first coming of laptop, the sales amount of laptop keeps increasing for

    decades. While in the year 2010, which we call the first year of tablet, it has become

    a promising and neglectable product which brings unpredictable profits. And we

    decided to invest in tablet and gain more profit and reputable.

    In order to increase the market share, we

    have studied two kinds of tablet product

    as our target. The product 1 is quite

    stable, and wed like to design it into a

    business tablet. As we all know, with the

    fast pace of the economic world, that

    businessman have to travel very often to

    get bills done or to negotiate with other competitors. So the key function they want is

    26 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    27/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    flexibility, mobility, portable, stable, security. So thats why we design this tablet. It

    looks like a normal laptop, but it is much superior to laptop. It can bend 30 degree and

    work as a desktop, which can give better view and convenience when displaying and

    processing document. At the same time, it can bend 180 degree and work as tablet.

    This tablet provide with great security, that business man can check email and stock

    market anytime they want, and without any possibility of leakage of information.

    The product two we promote is an

    entertainment tablet. As the appearance of

    Ipad, that we got to know that, the power of

    entertainment and service market is

    neglectable, it can bring great profits and

    chances. So in this tablet, we emphasis the

    entertainment function, that young people can use it as PlayStation, social network

    hub, video camera, movie player. It equipped with OLED touch screen, which looks

    super modern and fashionable.

    27 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    28/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    5.2 Marketing Strategy

    When conducting market strategy, 4P criteria has to be considered in order to make

    wise decisions.

    The first P is Product

    Product is the baseline for a company, if a company cannot design a product that good

    enough, it cannot develop in a sustainable way. Besides the design, quality of the

    product is also a very important factor that affects the customers decision. Even

    though the service develops adequately, none of the consumer would like to repair the

    product very often. Thus the quality of the product is a great insurance of consumer

    experience. Moreover, good and mutual interaction with customers has to be

    established. Since, if we want to sell product continuously, we should keep a good

    relation with consumer, if they get good experience, they will trust our company, our

    design and our service. Actually their rating affects the market value and reputation of

    the company. The final part of the product is professionalism of the design. Actually

    there are so many fake product in the market, if the product is not superior or not

    unique, that you will find duplicates in the market very soon. Therefore, all the

    product should be very professional and impossible to copy.

    28 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    29/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    The second P is Pricing

    Before the investment and retailing process, the purchasing power has to been

    examined. If consider the appreciation rate, the purchasing power has increase several

    times these decades. The price between 3000 HKD to 5000 HKD is acceptable, since

    it is the same amount as the spare money of a normal people. If people want to buy

    the product, it is far from impossible, that he can save some money for 1 month, then,

    he will get a high tech product. Another topic that is very hot recently is value-added

    feature. Since apple imported the concept value-added service, the iTunes store earn

    large amount of money. Therefore, our company has to consider the value-added

    feature. The preliminary idea is to set up an online store, where our customer can buy

    things use a specific icon, and several discount will be offered. Besides that, as our

    product is a high tech product, that people likes to show off if they got such kind of

    things. So wed like to design some luxury goods to match the tablet. We believe that,

    our product can give great confidence to our customer, to let them feel like as if they

    are success men.

    The third P is Promotion

    Nowadays, prompting a product is even much more important an appealing than the

    real product. If the advertisement is innovative and impressive, which leaves an

    unforgettable memory on audience mind, the audience my turn into potential

    29 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    30/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    customer just one second after they watched advertisement. Besides that,

    demonstration is also very important. Roadshow is a kind of new word that come into

    being recently, that the manufacture tends to display their product on the road, and let

    any people to try it. The apple platinum experiment store in Central is a good example

    in case. Every customer who steps into the three floor store can touch and play and

    use all the product in the store. Then the costumer gained valuable experience and in

    person judgment of your product, and they can decide whether to purchase one at the

    store. Finally, coupon promotion is a direct way to attract potential customer and let

    them to purchase more because the certain requirement of the coupon. Then our

    company can gain more profit per head.

    The fourth P is Place

    Twenty years ago, the only purchasing channel is from shopping mall and

    supermarket. Nowadays with the development of internet and software technology,

    various ways of purchasing come into being and stand the test from both time and

    market. Official store is good way real purchasing, people can buy things in our

    official store and register as member, then more discount information and privileges

    will be sent to them. B2C website is also a good choice after the successful model of

    eBay and Taobao. The young generation tends to buy things from internet, which is

    more time saving and money saving method. 3C chain store is a booming and new

    30 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    31/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    shopping style in China. And we can give delegation to 3C store and use their local

    retailing network to sell the product.

    6Alternative Identification, Evaluation and Selection (Finance)

    6.1 Alternative Selection

    As the selling strategy we stated above, we would like to set the price of our two

    products as follows:

    Product 1:

    As the target consumer of this product is businessman. The character of businessman

    is they are rich, and always busy, lack of considering the purchasing choice, emphasis

    the portability, stable and security. So the electronic component of product one is

    high-end, leading to the total price of it are much higher. So the price of it is 4888

    HKD.

    Product 2:

    The target consumer of this product is young people. They are not rich enough, but

    they are eager to have new things to show off. As they are young and intelligent, we

    31 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    32/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    can add more feature and functions to this tablet. The industry design and appearance

    has to be attractive and fashionable enough. The price we set for this is 3999 HKD.

    Descriptions Product 1 Product 2

    LCD Monitor HKD 890.00 HKD 1,011.00

    USB I/O Port HKD 15.00 HKD 12.00

    IC HKD 702.00 HKD 470.00

    PCB HKD 64.00 HKD 36.00

    Memory HKD 387.00 HKD 214.00

    HDD HKD 520.00 HKD 270.00

    Display & Sound HKD 279.00 HKD 310.00

    32 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    33/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    system

    Total Cost HKD

    2,857.00

    HKD

    2,323.00

    Price HKD

    4,888.00

    HKD

    3,999.00

    Table 6.1.1 Details for Products Price

    As the price and our market survey, the sales amount we predict is like below. Our

    market is limited to Hong Kong local market, which is relatively small compare to

    international market and mainland market. At the beginning, both product 1 and 2

    gain good reputation, and the sales amount will reach a peak in the year 3. After year

    3, the sales amount of product 2 will keep increasing, as the completeness of the

    function and more improvement. The sales mount of product 1 will start to decrease at

    year 4 and 5. In the year 5, product 2 will be the powerful candidate in the market and

    take over the market share of product 1.

    33 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    34/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Year 1 Year 2 Year 3 Year 4 Year 5

    Product 1 8400 10220 10780 10080 9660

    Product 2 9940 10360 10640 11060 11340

    Table 6.1.2 Sales Forecast for Products

    Figure 6.1 Sales Forecast for Products

    Apart from products price and sales forecast, we also made a calculation about project

    initial capital.

    Investment Product 1 Product 2

    Devices and other HKD 7,000,000.00 HKD 4,000,000.00

    34 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    35/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Salvage Value (in year 5) HKD 500,000.00 HKD 500,000.00

    R&D HKD 1,800,000.00 HKD 1,800,000.00

    Office HKD 9,500,000.00 HKD 9,500,000.00

    Others HKD 500,000.00 HKD 400,000.00

    Total HKD 19,300,000.00 HKD 16,200,000.00

    Table 6.1.3 Initial Capital for New Products

    In consideration of inflation influence, we predict the labor cost will increase based on

    10% inflation.

    Per unit Year 1 Year 2 Year 3 Year 4 Year 5

    35 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    36/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Labor

    Cost

    HKD

    300.00

    HKD

    330.00

    HKD

    363.00

    HKD

    399.30

    HKD

    439.23

    Table 6.1.4 Labor Cost

    We set the MARR for the new product is 20% as well as 16.50% tax-rate and 15%

    long-term interest. Then, we prepare the income and cash flow statements for both

    alternative products.

    36 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    37/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Product 1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

    R evenue H KD 41,059,200.00 HK D 49,955,360.00 H KD 52,692,640.00 HK D 49,271,040.00 HK D 47,218,080.00

    Expense

    Materials (HKD 23,998,800.00) (HKD 29,198,540.00) (HKD 30,798,460.00) (HKD 28,798,560.00) (HKD 27,598,620.00

    Labour (HKD 2,520,000.00) (HKD 3,372,600.00) (HKD 3,913,140.00) (HKD 4,024,944.00) (HKD 4,242,961.80

    Overhead (HKD 220,000.00) (HKD 240,000.00) (HKD 280,000.00) (HKD 230,000.00) (HKD 220,000.00

    Depreciation (HKD 2,895,000.00) (HKD 2,460,750.00) (HKD 2,091,637.50) (HKD 1,777,891.88) (HKD 1,511,208.09

    R&D (HKD 1,800,000.00) (HKD 800,000.00) (HKD 420,000.00) (HKD 150,000.00) HKD 0.00

    SG&A (HKD 2,600,000.00) (HKD 2,700,000.00) (HKD 2,700,000.00) (HKD 2,300,000.00) (HKD 2,300,000.00

    Taxable Income HKD 11,425,400.00 HKD 14,683,470.00 HKD 15,609,402.50 HKD 14,439,644.13 HKD 13,645,290.11

    ncome Taxes (16.5%) (HKD 1,885,191.00) (HKD 2,422,772.55) (HKD 2,575,551.41) (HKD 2,382,541.28) (HKD 2,251,472.87

    Net Income HKD 9,540,209.00 HKD 12,260,697.45 HKD 13,033,851.09 HKD 12,057,102.84 HKD 11,393,817.24

    Product 2 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

    R evenue H KD 39,750,060.00 HK D 41,429,640.00 H KD 42,549,360.00 HK D 44,228,940.00 HK D 45,348,660.00

    Expense

    Materials (HKD 23,090,620.00) (HKD 24,066,280.00) (HKD 24,716,720.00) (HKD 25,692,380.00) (HKD 26,342,820.00

    Labour (HKD 2,982,000.00) (HKD 3,418,800.00) (HKD 3,862,320.00) (HKD 4,416,258.00) (HKD 4,980,868.20

    Overhead HKD 190,000.00 HKD 240,000.00 HKD 270,000.00 HKD 280,000.00 HKD 310,000.00

    Depreciation (HKD 2,430,000.00) (HKD 2,065,500.00) (HKD 1,755,675.00) (HKD 1,492,323.75) (HKD 1,268,475.19

    R&D (HKD 1,800,000.00) (HKD 700,000.00) (HKD 340,000.00) (HKD 110,000.00) HKD 0.00

    SG&A (HKD 2,600,000.00) (HKD 2,700,000.00) (HKD 2,650,000.00) (HKD 2,400,000.00) (HKD 2,400,000.00

    Taxable Income HKD 11,437,440.00 HKD 12,119,060.00 HKD 12,484,645.00 HKD 12,907,978.25 HKD 13,066,496.61

    Income Taxes (16.5%) (HKD 1,887,177.60) (HKD 1,999,644.90) (HKD 2,059,966.43) (HKD 2,129,816.41) (HKD 2,155,971.94

    Net Income HKD 9,550,262.40 HKD 10,119,415.10 HKD 10,424,678.58 HKD 10,778,161.84 HKD 10,910,524.67

    Income Statement

    Table 6.1.5 Income Statements for New Products

    Product 1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

    Operating

    Activities

    37 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    38/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Net Income HKD

    9,540,209.00

    HKD

    12,260,697.45

    HKD

    13,033,851.09

    HKD

    12,057,102.84

    HKD

    11,393,817.24

    Depreciation (HKD

    2,895,000.00)

    (HKD

    2,460,750.00)

    (HKD

    2,091,637.50)

    (HKD

    1,777,891.88)

    (HKD

    1,511,208.09)

    Investment

    Activities

    Investment (HKD

    19,300,000.00)

    Salvage Value HKD

    500,000.00

    Net Cash Flow (HKD

    19,300,000.00)

    HKD

    6,645,209.00

    HKD

    9,799,947.45

    HKD

    10,942,213.59

    HKD

    10,279,210.97

    HKD

    10,382,609.14

    38 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    39/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Product 2 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

    Operating

    Activities

    Net Income HKD

    9,550,262.40

    HKD

    10,119,415.10

    HKD

    10,424,678.58

    HKD

    10,778,161.84

    HKD

    10,910,524.67

    Depreciation (HKD

    2,430,000.00)

    (HKD

    2,065,500.00)

    (HKD

    1,755,675.00)

    (HKD

    1,492,323.75)

    (HKD

    1,268,475.19)

    Investment

    Activities

    Investment (HKD

    16,200,000.00)

    Salvage Value HKD

    39 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    40/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    500,000.00

    Net Cash Flow (HKD

    16,200,000.00)

    HKD

    7,120,262.40

    HKD

    8,053,915.10

    HKD

    8,669,003.58

    HKD

    9,285,838.09

    HKD

    10,142,049.48

    Table 6.1.6 Cash Flow Statement for New Products

    According to financial statements listed above, we calculate the Net Present Wealth

    (NPW), Discounted Payback Period (DPP), and Internal Rate of Return (IRR) for

    both alternatives.

    Criterion Product 1 Product 2

    NPW HKD 12,122,457.82 HKD 12,133,059.11

    DPP 2.8 years 2.2 years

    40 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    41/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    IRR 37% 42%

    Table 6.1.7 Evaluation Criterion

    Through Table 6.1.7, it is obvious that the two alternatives have close NPW in year 5.

    However, relating to DPP and IRR, the Product 2 has a better performance. Hence,

    our chosen product for the next 5 years is Product 2.

    6.2 Bank loan offer and Selection

    We approach three different Banks to analyze their loan offer plan. Our loan amount

    is 16,200,000.00HKD.The three Bank Ltd are the leading private sector commercial

    banks in Hong Kong. The banks can be described as bank with a steady past,

    prospering present and promising future.

    Advantages:

    Interest rates:

    Banks that offer loans do so at competitive rates of interest and on mutually

    understood and accepted repayment terms, as compared to unconventional lenders.

    41 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    42/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Easy availability:

    Considering that lending institutions like banks must always keep their depositors

    money working for them and earning more money and interest than it pays out to

    depositors, bank loans should, in theory, always be available to anyone seeking one.

    Good lending terms and relations with the bank:

    If a borrower meets the banks lending criteria to the letter, he could benefit with a

    lower rate of interest and relaxed and easy repayment terms. Add to this the bonus of

    having a good working relationship with the bank.

    Speed:

    If the borrower has all the appropriate documentation, any bank can process his

    application within an hour.

    Uses:

    A borrower can use a bank loan for a number of reasonseither for setting up a

    business, or to buy home improvement goods or to go on a holiday. In fact, a bank

    loan is a financial package which helps you tide over a difficult time or set up

    business or invest in stocks. Considering it is a loan, it means that eventually you will

    have to pay the bank back within a stipulated time at a predetermined rate of interest.

    42 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    43/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    No need for collateral:

    For a personal loan, a borrower neednt produce any security or collateral. Besides,

    even the documentation is very little, as compared to other kinds of loans, thereby

    expediting the processing time.

    No need to specify use of the money:

    In case of a personal loan, one need not spell out what the money is going towards.

    All a borrower should do is to repay the money in equated monthly installments on or

    before the stipulated date.

    Disadvantages:

    Borrowers over-borrow:

    People sometimes over borrow money and get caught in their own debt. Often, this

    can lead to a shortfall in cash flow and payments can take precedence over income. To

    prevent this, loan repayments are restricted to a set percentage of a borrowers

    income.

    Prepayment penalty:

    43 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    44/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Often, loans come with a prepayment penalty which prevents the borrower from

    paying the loan earlier than the stipulated date without incurring any extra costs.

    Restrictions:

    Banks levy a number of restrictions on the transaction. This includes having a good

    credit history before applying for a loan, and there are often restrictions about how the

    money should be used.

    Bank A offer:

    Bank B offer:

    44 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    45/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Bank C offer:

    As the total amount we loan is 16,200,000.00HKD, and we have to compare the loan

    program provide by these three local banks, as the amount is important and significant

    to a small company. The loan from Bank A is not profitable, as the interest rate is the

    45 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    46/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    highest. Even though only 1 percent of extra amount is added to the interest rate, it

    means a lot to the loan amount as high as millions dollar. So we didnt consider their

    loan program. The loan from Bank B is acceptable, the payment period is short, but

    we have to pay more interest. While the Bank C has longer payment period, and the

    interest we have to pay is less. Therefore the final choice is Bank C.

    4 Risk Management

    7.1 Break Even Analysis

    Break even analysis finds the point where the total revenue is just sufficient to cover

    the total cost. The break-even point is one of the simplest yet least used analytical

    tools in management. It helps to provide a dynamic view of the relationships between

    sales, costs and profits. According to the after-tax net revenue, net salvage value, tax

    savings from depreciation, PW of capital expenditure and after-tax expenses. We can

    find the break even point of the analysis.

    46 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    47/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Cash inflow:

    Net salvage 500000

    Revenue:

    X(1-0.165)($3999) 3339.165X 3339.165X 3339.165X 3339.165X 3339.165

    X

    Depreciation

    credit

    0.15(depreciation) 2430000 2065500 1755675 1492324 190271

    Cash outflow:

    Investment -16200000

    47 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    48/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Variable cost:

    -X(1-0.165)($2800) -2338X -2338X -2338X -2338X -2338X

    Fixed cost:

    -(1-0.165)($1600000) -1336000 -1336000 -1336000 -1336000 -1336000

    Net cash flow -16200000 1001.165X

    +1094000

    1001.165X+

    729500

    1001.165X+

    419675

    1001.165X

    +156324

    1001.165

    X-

    1145729

    Table 7.1 Break Even Analysis

    We calculate the PWs of cash inflows and outflows as follows.

    PW of cash inflows:

    PW(15%)Inflow=(PW of after-tax net revenue)+(PW of net salvage value)+(PW of

    tax savings from depreciation)

    48 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    49/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    =3339.165X*(P/A,15%,5)+500000(P/F,15%,5)+2430000(P/F,15%,1)+2065500

    (P/F,15%,2)+1755675 (P/F,15%,3)+1492324 (P/F,15%,4)+190271(P/F,15%,5)

    =11193.548913X+248600+2113128+1561724.55+1154356.3125+8532584.8632+946

    02.7412

    =13704996.467+11193.548913X

    PW of cash outflows:

    PW(15%)Outflow=(PW of capital expenditure)+(PW of after-tax expenses)

    =16200000+(2338X+1336000)*(P/A,15%,5)

    =16200000+7837.4436X+4478539.2

    =7837.4436X+20678539.2

    The NPW of cash flows for the BMC is thus

    PW(15%)=13704996.467+11193.548913X-(7837.4436X+20678539.2)

    =3356.105313X-6973542.733

    PW(15%)=3356.105313X-6973542.733=0

    X=2077.8676717884032078

    49 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    50/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Through the calculation, we find the demand is about 2077. It means when the sales

    quantity reach the demand of 2077, the company could get 15% ROR. Then we can

    forecast the sales quantity based on the break even point.

    7.2 Sensitivity Analysis

    Sensitivity analysis can glean a sense of the possible outcomes of an investment. For

    our new product, we select unit price, unit cost, demand, and salvage value as

    variables to make a sensitivity analysis to determine the effect on the NPW and IRR.

    Sensitivity Analysis

    Variables -20% -10% 0% 10% 20%

    Unit price IRR -18% 16% 42% 65% 87%

    NPW (HKD

    11,531,385.83)

    HKD

    300,836.64

    HKD

    12,133,059.11

    HKD

    23,965,281.58

    HKD

    35,797,504.04

    50 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    51/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Unit Cost IRR 68% 55% 42% 27% 11%

    NPW HKD

    25,879,622.15

    HKD

    19,006,340.63

    HKD

    12,133,059.11

    HKD

    5,259,777.59

    (HKD

    1,613,503.93)

    Demand IRR 25% 33% 42% 50% 57%

    NPW HKD

    4,339,261.43

    HKD

    8,236,160.27

    HKD

    12,133,059.11

    HKD

    16,029,957.95

    HKD

    19,926,856.79

    Salvage

    value

    IRR 42% 42% 42% 41% 41%

    NPW HKD

    12,254,851.39

    HKD

    12,193,955.25

    HKD

    12,133,059.11

    HKD

    12,072,162.97

    HKD

    12,011,266.83

    Table 7.2 Sensitivity Analysis

    Figure 7.2.1 Sensitivity Graph of IRR

    51 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    52/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    Figure 7.2.2 Sensitivity Graph of NPW

    Through the sensitivity graphs, for both NPW and IRR we find there is a direct ratio

    relationship with unit price and demand. On the contrary, as the unit cost increasing,

    the features will have a dramatic decline. In addition, it is salvage value that almost

    make no difference on the NPW and IRR.

    7.3 Scenario Analysis

    Three plausible scenarios assume a set of values for key input variables. We assume

    some fluctuation of the demand and price. Then calculate the NPW of cash flows..

    The worst case: demand drop 45%, price 25% discount

    X=4400

    PW(15%)Inflow=(PW of after-tax net revenue)+(PW of net salvage value)+(PW of

    tax savings from depreciation)

    52 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    53/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    =2504.165X*(P/A,15%,5)+450000(P/F,15%,5)+2430000(P/F,15%,1)+2065500

    (P/F,15%,2)+1755675(P/F,15%,3)+1492324(P/F,15%,4)+190271(P/F,15%,5)

    =2504.165X*3.3522+450000*0.4972+2113128+1561724.55+1154356.3125+853258

    4.8632+94602.7412

    =36935632.4172+223740+2113128+1561724.55+1154356.3125+8532584.8632+946

    02.7412

    =50615768.884

    PW(15%)Outflow=(PW of capital expenditure)+(PW of after-tax expenses)

    =16200000+(2839X+1586500)*(P/A,15%,5)

    =2839X*3.3522+1586500*3.3522+16200000

    =12491600+21518265.3

    =34009865.3

    The NPW of cash flows for the BMC is thus

    PW(15%)=50615768.884-34009865.3=16605903.584

    Most-likely case:

    X=8000

    53 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    54/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    The NPW of cash flows is thus

    PW(15%)=13704996.467+11193.548913X-(7837.4436X+20678539.2)

    =3356.105313X-6973542.733

    PW(15%)=19875299.771

    The best case: demand increase 30%, price increase 20%

    X=10400

    PW(15%)Inflow=(PW of after-tax net revenue)+(PW of net salvage value)+(PW of

    tax savings from depreciation)

    =4007.165X*(P/A,15%,5)+550000(P/F,15%,5)+2430000(P/F,15%,1)+2065500

    (P/F,15%,2)+1755675(P/F,15%,3)+1492324(P/F,15%,4)+190271(P/F,15%,5)

    =4007.165*10400*3.3522+550000*0.4972+2113128+1561724.55+1154356.3125+85

    32584.8632+94602.7412

    =153431169

    PW(15%)Outflow=(PW of capital expenditure)+(PW of after-tax expenses)

    =16200000+(2004X+1169000)*(P/A,15%,5)

    =16200000+(2004*10400+1169000)*3.3522

    54 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    55/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    =89983933.32

    The NPW of cash flows is thus

    PW(15%)=153431169-89983933.32=63447235.68

    Variable

    Considered

    Worst Case Most Likely Case Best Case

    Unit demand 4400 8000 10400

    Unit price HKD2,999 HKD3,999 HKD4,799

    Variable cost HKD3,400 HKD2,800 HKD2,400

    Fixed Cost HKD1,900,000 HKD1,600,000 HKD1,400,000

    Salvage value HKD450,000 HKD500,000 HKD550,000

    55 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    56/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    PW(15%) HKD16,605,904 HKD19,875,300 HKD63,447,236

    Table 7.3 Scenario Analysis

    Through scenario analysis, it displays a marked difference for three types of

    scenarios. When the demand has a 45% drop and 25% discount of price. The

    PW(15%) is about 16,605,904 HKD. Nevertheless, when the demand increase 30%,

    and price increase 20%.There is a big profit. The result is 63,447,236 HKD.

    In a word, if a company pursues maximize profit, we should do our best to increase

    sales and price as well as reduce the fixed cost and variable cost.

    7.4 Recommendation

    As the company aim to promote a new product, it is important to have a strategic

    approach to managing supply chain risks and consider the varied and unexpected

    forms of disruptive events and losses by taking a holistic view of loss sources

    combined with emerging issues and business considerations for the industry.

    Meanwhile, because the company only has a 2-year business, lack of capital is

    56 / 57

  • 8/2/2019 6050 Group Project Report v4.0

    57/57

    MEEM 6050 Engineering Economic Analysis Group Project Report

    another facing difficulty. We should speed up the cash flow to maintain adequate

    committed credit lines and cash balances to ensure sufficient and flexible funding is

    available to the company.

    5 Conclusion

    As the report mentioned above, our business operates in good condition with a

    positive financial structure. Through the promotion of our new product, we believe

    that we can capture much more market share as well as organizational reputation.

    Finally, it is feasible that we will come into the GEM and become one of the listed

    company in Hong Kong after 5 years.


Top Related