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FINANCIAL CASE BASE STUDY:

DEVELOPING FINANCIAL INSIGHT


A Case Study in Financial Management (MM5007)

Syndicate 2:
Christyna P. Carna (29117506)
Dennis Suryana (29117396)
Gina Hudayana (29117508)
Laksamana Virtuecrat (29117393)

Syndicate 13:
Radityo Chrisna Adi
Muhammad Alfath
Carissa Permatadewi

Lecturer:
Maryat Nirwandi, MBA

CLASS OF CCE 58
MASTER OF BUSINESS ADMINISTRATION
INSTITUT TEKNOLOGI BANDUNG

2018
I. CASE OVERVIEW

Inside the Developing Financial Insight Case Study, there are total of 10 questions that needs to be resolved,
our syndicate chooses number 5, number 5 is about business expansion, determining whether the
acquisition provides a good solution whether or not.
Below are the case questions, quoted as a whole:
“You are contemplating the purchase of a one-half interest in a corporate airplane to facilitate the expansion
of your business into two new geographic areas. The acquisition would eliminate about $220,000 in
estimated annual expenditures for commercial flights, mileage reimbursements, rental cars, and hotels for
each of the next 10 years. The total purchase price for the half-share is $6 million, plus associated annual
operating costs of $100,000. Assume the plane can be fully depreciated on a straight-line basis for tax
purposes over 10 years. The company’s weighted average cost of capital (commonly referred to as WACC)
is 8%, and its corporate tax rate is 40%. Does this endeavor present a positive or negative net present value
(NPV)? If positive, how much value is being created for the company through the purchase of this asset? If
negative, what additional annual cash flows would be needed for the NPV to equal zero? To what
phenomena might those additional positive cash flows be ascribable?”

II. KEY ISSUES

1. How much additional annual cash flows per year would be needed for the NPV to equal zero?
2. How to calculate the PV and NPV to know the real financial condition of the company?

III. ANALYSIS

Today 1 2 3 4 8 9 10

$312,000 $312,000 $312,000 $312,000

$312,000 $312,000 $312,000

6.710

$2,093,520
Paid ($6,000,000)

NPV ($3,906,480)

purchase price for the half share $6,000,000

estimated annual expenditure for the next 10 years $220,000

annual operation cost $100,000

weight average cost of capital 8%

tax rate 40%

1-tax rate 60%

annual tax due to depreciation


$240,000
(purchase price for the half share / 10 years x tax rate)

after tax annual expense saving


$132,000
(estimated annual expenditure for the next 10 years x 1-tax rate)

after tax annual operating cost


$60,000
(annual operation cost x 1-tax rate)

Total annual cash flow


(annual tax due to depreciation + after tax annual expense saving - after $312,000
tax annual operating cost)

present value factor for annual saving


6.71
(based on exhibit 4 for the 8% coloumn, 10 year row)

present value factor of the annual cash flow


$2,093,520
(present value factor for annual saving x total annual cash flow)

NPV
(present value factor of the annual cash flow - purchase price for the $-3,906,480
half share)
additional annual cash inflow needed to push NPV to zero
$582,188
(NPV (negative) / present value factor for annual saving)

Annual tax savings due to depreciation equal $240,000  $6,000,000/10 years x 40 % tax rate
After- tax annual expenses savings equal $132,000  $220,000 x [1-0,4])
After- tax annual operation cost equals $60,000  $100,000 x [1-0,4])
Therefore, the total annual cash flows sum to a positive $312,000  ($240,000 + $132,000 - $60,000). And,
using case Exhibit 4 for the 8 % column, 10- year row we get the factor of 6.710, which renders a PV of the
annual cash flows equal to $2,093,520. Still, with a relatively large capital outlay today of $6,000,000, the
NPV of this endeavor is an unattractive negative amount of ($3,906,480).

IV. CONCLUSION & RECOMMENDATION

Based on our analysis, we can conclude that investing in this corporate airplane can be detrimental because
from the analysis we can know that the Net Present Value (NPV) is Negative, many factors can be a cause.
Some of actions needed to save the investment to a zero NPV factor. Our recommendations to save the
investment is add more cash in annual cash flow per year : +$582,188 per year. If we still want to invest in
this corporate, we should add total amount of the annual cash flow per year : $312,000+$582,188 =
$894,188 to make the NPV factor calculation to zero (0) just to make this investment doesn’t result in a
cash loss
V. EXHIBIT