FINAL PROJECT

Training program:
(Master of Business Administration)
Subject:
Section 1. Financial Management
Send to: accounting@eneb.com

Last Name/Surname: Ali

Name: Adil
ID/Passport: UP1816382
Address: 78-1 B block PCSIR Ameer Chowk College Road
Lahore
Region: Asia
Country: Pakistan
Telephone: +92 332 4248612
E-mail: adil239ali@gmail.com
Date: 25-09-2023

ENEB Business School

Page 1
 Back Ground
The company ABC, L.C. manufactures some products with an average sales
price of € 25/unit, with fixed annual costs of € 110,000. The average unit variable
costs are € 5.

Question # 1
a) At what volume of production will the threshold of profitability be
reached?
b) Assuming that annual sales are estimated at 20,000 units, being the
distribution evenly over a year, on what date will the break-even
point be reached?
c) What would be the sales value or turnover corresponding to the
threshold of profitability?

Answer:
Break-even analysis is a critical financial assessment that entails the meticulous
computation and scrutiny of an organization's margin of safety, taking into
account the accrued revenues and corresponding expenditures. This analytical
approach encompasses an exploration of diverse pricing structures, aligned with
varying degrees of market demand. Through break-even analysis, enterprises
endeavor to ascertain the requisite sales volume required to offset the entirety of
the firm's fixed operating costs [ CITATION Ada191 \l 1033 ].
a) At what volume of production will the threshold of profitability be
reached?
Break Even Point in Unit = FC/P-VC
= 110000
25-5
= 110000
20
= 5,500 units

Thus, the threshold of profitability will be reached at 5,500 units

b) Assuming that annual sales are estimated at 20,000 units, being the
distribution evenly over a year, on what date will the break-even point
be reached?
Break-Even Date = Units/(Annual Unit Sale/365)
= 5,500
20000/365
= 5,500
54.795 or 55
= 100.375 or 100 days

Therefore, Company ABC, L.C will break even on April 10th or 9th if it is
aleap year

c) What would be the sales value or turnover corresponding to the

threshold of profitability?
Sales Value = units* unit price
= 5,500*€25
= €137,500
Question # 2
The company Derabel, S.A. is considering buying a new machine for its
production process. This project means an initial cost of € 200,000 and the
machine is estimated to have a useful life of 5 years. The maximum productive
capacity of the machine is 200,000 units per year. However, the first year it is
expected that the activity will be 70% of the maximum installed capacity, reaching
100% from the second year.
During the first year, the unit sales price will be € 2.50, the unit variable cost €
1.50 and the fixed annual cost € 60,000, resulting in cumulative yearly increases
of 4% in the price of the product sale, 3% on variable costs and 2% on fixed
costs.
Also, it is assumed that:
 The company uses a linear depreciation system, and the residual
value of the machine is € 25,000. Besides, the sale value of the machine
at the endof its physical life will be € 30,000 that will be charged in cash.
 The nominal discount rate (kN) used by the company is 8% per year
and constant for the planned period.
 The tax rate that taxes the benefits is 25%. Taxes are paid in the
period following their accrual.
 All production is sold in the reference period.
 All income and expenses are charged and paid in cash.

With the above data, determine the Net Cash Flows after taxes of the project
described above. Calculate the net absolute return.

Answer:
 Year #1 Year #2 Year #3 Year #4 Year #5 Year #6
Investment 200,000
Production 70% 100% 100% 100% 100%
Capacity

Units 140000 200000 200000 200000 200000

Produced
Sales Price Per € 2.50 € 2.60 € 2.70 € 2.81 € 2.92
Unit - Annual
4% increase
Annual Sales € 350,000.00 € 520,000.00 € 540,800.00 € 562,432.00 € 584,929.28
Variable Cost € 1.50 € 1.55 € 1.59 € 1.64 € 1.69
-Annual 3%
increase
Annual € 210,000.00 € 309,000.00 € 318,270.00 € 327,818.10 € 337,652.64
Variable Cost
Fixed Cost € 60,000.00 € 61,200.00 € 62,424.00 € 63,672.48 € 64,945.93
-Annual 2%
increase

Total Income € 350,000.00 € 520,000.00 € 540,800.00 € 562,432.00 € 584,929.28

Total Costs € 270,000.00 € 370,200.00 € 380,694.00 € 391,490.58 € 402,598.57
Benefit € 80,000.00 € 149,800.00 € 160,106.00 € 170,941.42 € 182,330.71

Sale € 30,000.00
Immobilized
Material
Residual Value € 25,000.00
Amortization € 35,000.00 € 35,000.00 € 35,000.00 € 35,000.00 € 35,000.00

Taxable € 45,000.00 € 114,800.00 € 125,106.00 € 135,941.42 € 152,330.71

Income
25%Tax € 11,250.00 € 28,700.00 € 31,276.50 € 33,985.36 € 38,082.68

BDI € 80,000.00 € 138,550.00 € 131,406.00 € 139,664.92 € 153,345.35

Amortization € 35,000.00 € 35,000.00 € 35,000.00 € 35,000.00 € 35,000.00 TOTAL
Net Cash Flow € 115,000.00 € 173,550.00 € 166,406.00 € 174,664.92 € 188,345.35 € 617,966.27

The Net present value (NPV) is a technique used to determine the presentworth
of all upcoming cash flows generated by a project, including the initial capital
investment. It is widely used in capital budgeting to determine the projects likely
to turn the greatest profit. [ CITATION Joh19 \l 1033 ]

VAN= -CF0 + CF1 + CF2 + CF3 + CF4 + CFt

(1+r)1 (1+r)2 (1+r)3 (1+r)4 (1+r)t

VAN = - 200,000 + 115,000 + 173,550 + 166,406 + 174,664.92 + 188,345.35

1+0.08 (1+0.08)2 (1+0.08)3 (1+0.08)4 (1+0.08)5

VAN=-200,000 + 106,481 + 148,791.15 + 132,099.70 + 128,382.88 +

128,184.51

VAN = 443,939.24
TIR = - 200,000 + 115,000 + 173,550 + 166,406 + 174,664.92
+188,345.35
1+r (1+r)2 (1+r)3 (1+r)4 (1+r)5

lo € (200,000.00)
F1 € 115,000.00
F2 € 173,550.00
F3 € 166,406.00
F4 € 174,664.92
F5 € 188,345.35
TIR 68.38%

Based on the figures presented, this would be a profitable venture for

Derabel,S.A.

Question # 3
The person in charge of the finances of the company MGT, S.A. wants to know
the company's situation concerning the industrial sector to which it belongs. For
this, it has the following information regarding the industry:
a) General liquidity ratio is 1.55; the acid test is 1.20, and the ratio
between the available and the current liabilities is 0.95.
b) The debt ratio stands at 1.25. The margin on sales is 21%. The
investment rotation is 1.45 times.
c) Economic profitability is around 23%, and financial profitability is
29%
The data referred to the company (in thousands of €) are the following:

Assets Liability and Net Equity

Non-current asset (net) 170 Equity 125
Stocks of finished Reservations 25
products 45

Clients 65 External Resources 105

Banks 70 Loans 65
Supplier 30
Total Assets 350 Total Net Equity 350

In addition, it is known that:

• Sales are € 250,000 and its direct cost of € 105,000.
• Amortization of € 70,000.
 • Long-term debt generates interest at 5%, short-term bank loans at
7%,and the departure of suppliers does not accrue any interest.
• The Corporation Tax is 25%.

Calculate the liquidity, acid test and debt ratios, and compare them with the sector
data. It also calculates the economic and financial returns, and the margin on
sales and investment rotation, even making a comparison between the company
and sector.
Answer:

Financial
Account
Sales
Net Sales € 250,000.00
Direct Cost € (105,000.00)
Gross Marginal Sales € 145,000.00

Operating Income € 145,000.00

Amortization € (70,000.00)
Operating Profit € 75,000.00

Income
Expenses € (9,800.00)
Results € (9,800.00)

Profit before tax € 65,200.00

Income and Non-Deductible Expenses

Profit Before Tax € 65,200.00
Tax Benefit € (16,300.00)

Net Result (BDI) € 48,900.00

Liquidity Ratio
Liquidity ratio is assets divided by liabilities. [CITATION Wha19 \l 1033 ]. It is a
set of indicators used to determine whether a company is able to generate
cash.
The Liquidity Ratio:

General Liquidity = Current Assets

Current Liabilities

= €45,000+€65,000+€70,000
€30,000

Acid Test
The acid-test ratio uses a firm's balance sheet data as an indicator of whether
it has enough short-term assets to cover its short-term liabilities. [ CITATION
Wil192 \l 1033 ]

Acid Test = Current Assets- Stock

Current Liabilities
= (€45,000 + €65,000 + €70,000) - €45,000
€30,000

= €180,000- €45,000
€30,000

= €135,000
€30,000

Debt Ratio
Debt ratio is a solvency ratio that measures a firm’s total liabilities as a
percentage of its total assets. In a sense, the debt ratio shows a company’s ability
to pay off its liabilities with its assets. In other words, this shows howmany
assets the company must sell in order to pay off all of its liabilities.[
CITATION MyA20 \l 1033 ]

Ratio of Autonomy = own resources

Total assets

= 170 + 45 + 65
350
= 0.8

Debt Utilization Ration = other resources

Total assets
 = 70
350
= 0.2
Short term debt ratio = 30

125 + 25
= 0.2
Long term debt ratio = 105 + 65
125 + 25
= 1.13
Debt ratio = 105 + 65 + 30
125 + 25
= 1.33
Economic Profitability
ROI = EBIT = 75,000 = 21.43%
Total Assets 350,000

Financial Profitability
ROE = BDI = 48,900 = 32.60%
Equity 150,000
Commercial Revenue

Commercial Margin = EBIT = 75,000 = 51.72%

Net Sales 145,000

Rotation
Rotation = Net Sales = 145,000 = 41.43%
Total Assets 350,000

Rotation = Net Sales

Total Assets

= 145,000 = 41.43%
350,000
 Company/Sector Comparison

Ratios Company Sector Differencee

Details % Details %
Overall Liquidity 6 1.55 4.45
Acid Test 4.5 1.2 3.3
Debt Ratio 1.33 1.2 0.13
Short term debt ratio 0.2
Long term debt ratio 1.13
Economic Profitability 21.43 2.3 2
ROI
Financial Profitability 32.6 29 3.6
ROE
Commercial Margin 51.72 21 30.72
Rotation 0.41429 1.45 -1.03571

Question # 4
An investment requires an initial disbursement of € 2,500,000 and the duration of
the project is 3 year
s, in the first of which it generates a cash flow of € 1,500,000, in the second €
3,700,000 and the third € 4,100,000.
a) Calculate the Net Present Value of the investment, knowing that inflation
is 3% cumulative annually and that the required profitability in the
absence of inflation is 8%.
b) Calculate the actual internal rate of return of the previous investment.

ANSWER:
a)
n
VAN = - I0 + Ʃ ft
T=5 (1 + k) t

VAN = -I0 + F1 + F2 + F3
(1 +k) (1 + k)2 (1 + k)3

VAN = -2,500,000 + 1,500,000 + 3,700,000 + 4,100,000

1 +0.1124 (1 + 0.1124)2 (1 + 0.1124)3

VAN = -2,500,000 + 1,500,000 + 3,700,000 + 4,100,000

1.1124 1.2374 1.3765

VAN = -2,500,000 + 1,348,435.81 + 2,990,140.62 + 2,978,568.83

VAN = €4,817,145.26

b)

TIR 2,500,000 = 1,500,000 + 3,700,000 + 4,100,000

(1 + r) (1 + r)2 (1 + r)3

=86.52%

Question # 5

We know the following data of the company Perfilados, S.A:

a) It bought and consumed € 105,000 in raw materials for the manufacture of
its product and, on average, maintained a stock level of them in the stock of
€ 9,250. Calculate the average storage period. Calculate the average storage
period.

b) The cost of its annual production is € 198,000, and the average value of the
products under development is € 11,000. Calculate the average
manufacturing period.

c) Taking into account that the company exclusively sold all its annual
production and that the average value of its stock in finished goods
warehouse was € 18,500, it calculates its average sales period.
d) Assuming that the company sold its products for an amount of € 290,000 and
that the customers had on average a debt with the company of € 17,000, it
calculates the average collection period.
e) With the data obtained in the previous points, it calculates the average period
of economic maturity of Perfilados, S.A.
ANSWER:
a) The Average Storage Period:

PMA = 9,250
(105,000/365)

PMA = 9,250
287.7

PMA = 32.2 days

b) The Average Manufacturing Period:

PMF = 11,000
(198,000/365)

PMF = 11,000
542.46

PMF = 20.3 days

c) The Average Sales Period:

PMV = 18,500 = 34.1 days

d) The Average Collection Period:

PMC = 17,000
(290,000/365)

PMC = 17,000
794.5

PMC = 21.4 days

 e) The Average Economic Maturity:

PMM = PMA + PMF +PMV + PMC

PMM = 32.2 + 20.3 + 34.1 + 21.4
PMM = 108 days

QUESTION #6

We know the following data of an investment that the company has made:
 An initial disbursement of € 2,000,000 and generates the collections and
payments in the successive years of its duration that are shown in the
following table:

Years Collection (€) Payments (€)

1 Year 4.500.000 3.800.000
2 Year 5.500.000 4.500.000
3 Year 6.000.000 5.000.000
4 Year 4.000.000 3.200.000

Calculate the IRR of the previous project. Justify for what type of
discount this investment will be made.

ANSWER:

Years Collections Payments Net Flows

1 € 4,500,000.00 € 3,800,000.00 € 700,000.00
2 € 5,500,000.00 € 4,500,000.00 € 1,000,000.00
3 € 6,000,000.00 € 5,000,000.00 € 1,000,000.00
4 € 4,000,000.00 € 3,200,000.00 € 800,000.00

TIR 2,000,000 = 700,000 + 1,000,000 + 1,000,000 + 800,000

(1 + r) (1 + r)2 (1 + r)3 (1 + r)4

= 26.08%
Thus, the company can make an investment only if the investment rate is less
than 26.08%.
In justifying the discount rate:
I0 200000
0
F 700000 1000000 100000 800000
t 0 one 2 3 4
k 25% 25% 25% 25%
(1 +k)t 1,27 1,61 2,05 2,60
TOTAL 551,181.1 620,001.2 488,189.9 307,521.2
0 4 5 3

In light of the above, if K is greater than the IRR, the NPV would be negative
and an investment would not be advantageous. Consequently, it is imperative
that K must be less than 26.08%. Therefore, K of 25% (or less) would be a
feasible application in order to still be profitable.
References

• Course, M. A. (2020, January 28). Debt Ratio. Retrieved from My Accounting

Course: https://www.myaccountingcourse.com/financial-ratios/debt-ratio

• Glossary, B. (2020, January 28). What Is an Acid Test? Retrieved from BPlans:
https://articles.bplans.com/what-is-acid-test/

• Hayes, A. (2019, August 20). Break-Even Analysis. Retrieved from

Investopedia.com:
https://www.investopedia.com/terms/b/breakevenanalysis.asp

• Hayes, A. (2019, May 13). Liquidity Ratio Definition. Retrieved from

Investopedia.com: https://www.investopedia.com/terms/l/liquidityratios.asp

• Hayes, W. K. (2019, April 20). Debt Ratio Definition. Retrieved from

Investopecia.com: https://www.investopedia.com/terms/d/debtratio.asp

• Jagerson, J. A. (2019, April 11). What Is the Formula for Calculating Net
Present Value (NPV)? Retrieved from Investopedia.com:
https://www.investopedia.com/ask/answers/032615/what-formula-calculating-
net-present-value-npv.asp
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Investopedia.com: https://www.investopedia.com/terms/a/acidtest.asp

• Rehayem, M. (2019, March 22). What Is Liquidity? (+How to Calculate Your

Liquidity Ratio). Retrieved from G2dotcom Inc.: https://learn.g2.com/liquidity