KWANTLEN POLYTECHNIC UNIVERSITY

School of Business
BUSM 5120 PO1

MAGIC TIMBER AND STEEL: INVESTMENT

EVALUATION WITH NET PRESENT VALUE

Prepared by:
Kiran Kumar Teneti (100392352)
Prem Kumar (100383014)
Prerna Chugh (100386227)
Nicole Dysangco (100386874)
Jagneet Kaur (100389635)

Submitted on:
November 26, 2019
 TABLE OF CONTENTS

I. Overview

II. Sensitivity Analysis

A. Quantitative factors

i. NPV Analysis with DF 11%

ii. NPV Analysis with DF 12%

iii. NPV Analysis with Change in the 5th Year selling price of the Delta to

$80,000 (AU$)

iv. NPV Analysis with Change in the maintenance costs for the Delta:

Year 1 costs are $1,000, increasing by $1,000 each year.

v. NPV Analysis with Change all the above factors (ii, iii, iv) together.

B. Qualitative factors

III. Recommendations

IV. Conclusions

V. Appendix

i. Appendix 1.A, 1.B, 1.C, 1.D

ii. Appendix 2.A, 2.B, 2.C, 2.D

iii. Appendix 3.A, 3.B, 3.C

iv. Appendix 4.A, 4.B, 4.C

v. Appendix 4: SWOT Analysis

I. OVERVIEW

In this report, we have calculated and analyzed the Net Present Value of Magic

Timber company for Old machine data and new machine data. We calculated Net present

value(NPV) with discount factor of 11% ( Appendix-1.A) for old machine, Net present

value(NPV) with discount factor of 11% ( Appendix-1.B) for new machine and, we have

done sensitivity analysis with 12% Discount factor for old and new machine( Appendix-2.A,

Appedix-2.B respectively), by changing the new machine delta maintenance costs and 5th

year selling price of delta(Appendix-, Appendix-), and final NPV calculations with all the

changes(ii, iii, iv) together to find out whether Magic timber company keeps the old machine

or go for New machine purchase.

In our analysis we found that the Net Present Value with discount factor 11% is

16200(Appendix-1. D). The +16200 NPV indicates that investment in new timber

manufacturing machine (Delta) should be done because it will reduce the cash flows of the

company but there is one thing to be considered and that is; these calculations only provides

the information regarding the replacement of old machine (Matrix) into the new machine

(Delta). These calculations do not contain the information regarding the increase in capacity

of production and to meet the future expectations of market demand for timber. We also

calculated NPV with discount rate 12%, and found positive value +12290 which indicates, in

both the cases the NPV value is + and company can go ahead and purchase the new machine.

But company NPV is more with discount factor 11% than 12%. Its management decision to

use which discount factor is more profitable to the company.

Along with above analysis, we have also done changes in selling price of the new

machine from 60000 to 80000(Appendix-3.A) and found that positive NPV(Appenidix-3.C)

and there is not much difference between the selling price 60000 and 80000 and the changes
 to the selling price suggest that the Magic timber company should buy new machine due to

low operating costs with new machine compared to old machine.

Finally, we have changed 5th year selling price to 80000, maintenance cost to 1000,

and discount factor with 12% ad we have analysed the company performance, then we found

that the new machine is the be the best option for Davidson instead of continuing old

machine. He will be able to save AUD41,882.07, which is the highest amount of savings

among all the other scenarios given in this sensitivity analysis. And there is drastic change in

NPV (+45779.12) values if we take all the above changes. Apart from above calculations and

analysis, we have also done Payback period, IRR, ARR, and profitability index to find out

which option is best suitable to the magic timber company.

In the end, we have provided valuable recommendation based on the above analysis

while considering all qualitative factors and quantitative factors.

II. SENSITIVITY ANALYSIS

A. Quantitative factors

i. Net present value with discount factor of 11%

The time value of money can have a significant impact on the budgeting decision. In

choosing between repairing and maintaining the old machine versus buying a new machine,

as seen from appendix-I.A, the present value of total operating expenses or cash out flow for

the new machine is AUD 257817.59 which is AUD 31276.03 less than the operating expenses

incurred by the old machine, which clearly suggests to invest in a new machine at this

discount rate. In our discounted cash flow analysis, the net present operating expense is

mainly influenced by three main factors, ‘Depreciation tax shield’ (4800 per year) and the
Loan payback at the end of the 5th year (105,000*0.59) which at present is valued only AUD

62317.50 based on the analysis and the 11% discount factor.

The valuation obtained is very sensitive to many assumptions/forecasts and can

therefore vary over a wide range. If even one key assumption is off significantly, it can lead

to a wildly different valuation. This is quite possible, given that analysis involves predicting

future events (forecasting). This leads to the concept of “Garbage in = Garbage Out”, if

wrong assumptions are made, the result will be wrong.

ii. Net present value with discount factor of 12%

Performing a sensitivity analysis by tweaking several assumptions will help in

understanding the changes in output such as net present value (NPV) of a project, internal

rate of return (IRR), and discounted payback period, Annual rate of return. It also provides a

better understanding of the risks associated with a project with respect to the input changes.

By doing so we can identify the input variables that represent the greatest vulnerability for

the project.

From appendix I.C and II.C, Changes in discount rate (11% to 12%) affect the output

values positively, increasing the operating cost savings by a mere AUD 138.67 while

reducing the payback year from 3.36 to 3.34 and the Internal rate of return of the project

remains unchanged at 15% along with the Annual rate of return at 12% which is independent

of the discount factor. But there Is a slight drop in the profitability index from 2.49 to 2.39.

With minor changes to the net present value and the Internal rate of return (15%) greater than

the discount rate (11% and 12%), it is a good decision to invest in the new machine, as the

increase in discount factor affects the decision positively as the decision is less sensitive to

changes in discount rate.

 iii. Net present value with year 5 selling price of delta at aud 80,000

If the selling price of Delta will be changed to AUD80,000, the new machine would

be the more favourable option for Davidson. As seen in Appendix 3-A, the costs will still be

lower at AUD253,943.67 for Delta comparing to AUD289,093.62 amount of costs for Matrix.

The projected annual operating costs for the old machine from 2016-2020 will be higher than

the Matrix. For 2021, operating costs for the new machine will be higher mainly because of

payment of the loan principal is due that year. Davidson will also have a net savings of

AUD35,149.95 in 2021 for this option compare to when Delta has a selling price of

AUD60,000. Looking at the payback period, it will only take the company 2.99 years to

recover form the cost of investment which is way better than 3.36 years. There is also a

substantial difference when it comes to internal and annual rate of return of Delta at 21% and

22% respectively, comparing to 15% and 12% of the old machine.

iv. Net present value with maintenance costs for delta (year 1 cost is aud1,000,

increasing by aud1,000 each year)

If maintenance costs for Delta will be changed to AUD1,000 for Year 1 and increasing

by AUD1,000 by each year, present value of total costs will be AUD255,230.46 which is

AUD33,863.16 lower than the costs that will be incurred for the old machine. For the first 4

years, operating costs will still be lower if Delta is bought with an average yearly savings of

AUD 7,589.35. For year 2021, annual cost will be higher at AUD57,297.97 for Delta

comparing to AUD41,213.74 of Matrix; this is because the principal of the loan used to

purchase the new machine needs to be paid at this year. Talking about payback period,

Davidson will get the return of his investment of new machine after 3.1 years which is just a

few months earlier than with Matrix at 3.36 years. Internal rate of return and annual rate of
return are also looking better than with the old machine at 18% and 16%, respectively. There

is no significant difference when it comes to profitability index – 2.43 for Delta while for

Matrix it is 2.46.

v. Net Present Value Analysis with all the above factors (ii, iii, iv) together

When we change discount rate to 12%, Year 5 selling price of Delta to AUD80,000,

and make adjustments on the maintenance costs, the new machine would definitely be the

best option for Davidson. He will be able to save AUD37,556.33, which is the highest

amount of savings among all the other scenarios given in this sensitivity analysis. The main

reason for this is the expensive yearly maintenance costs of the old machine and large

investments needed immediately and on Year 3 (AUD28,000 and AUD4,000). Total annual

operating costs for the company will be lower with the new machine but not until 2021 when

Davidson needs to pay the principal of the loan he acquired. This scenario also has the

shortest payback period at 2.8 years. It is the earliest time his investment will reach the

breakeven point, which only proves again that buying the new machine is very desirable for

the company. Internal and annual rate of return are also the highest at 23% and 25%,

respectively. The profitability index in this case is the lowest at 2.33 however, the ratio is still

greater than 1 which means buying the new machine will still be profitable and an attractive

investment move for Davidson.

B. Qualitative factors

The main issues were the increase in production cost, obsolescence of production

machine, increase in competition and decrease in profit margins faced by Magic Timber and

Steel in 2015. To overcome these issues, company considered the two alternatives:

First one was to repair the old production machine (Matrix), which had the main issue

of obsolescence. This machine required heavy repair and maintenance cost at that time to
upgrade the version along with the fixed $7,000 cost every year in repair and maintenance

account. It would increase the cost of production along with the increased risk of labor

damages because that machine was very sensitive for the production of timber and could kick

back easily if labor did not put timber on its desired position. Also, another problem with the

old machine was that, it had the less capacity to produce goods. With this less efficient

machine, Magic Timber and Steel had been very much concerned about its future ability to

fulfill the demands of timber in the market.

The second was to replace the old machine (Matrix) with the new machine (Delta). To

buy this new timber manufacturing machine, Magic Timber and Steel needed to take the loan

on 6% annual interest payment upon principal amount with the repayment of principal

amount after the completion of fifth year. The new timber manufacturing machine had the

ability to increase the production capacity of Magic Timber and Steel with the advanced

technology which enabled the machine to produce the cost-efficient products which led to the

low cost of production. If Magic Timber and Steel purchased this new machine, it would

provide the competitive edge over its competitors by maximizing the profit and low

production cost and low labour damage risks.

RECOMMENDATIONS

After detailed analysis of above statements, we would highly recommend David should go

for the new wood cutter finisher. Because keeping the same machine will also require $

63000 which is breakdown as $ 28000 required immediately for the repair, $7000 every 5

years and the larger scheduled service in the third year which will cost around $4000. It is not

a feasible idea to invest such a big amount on the machine which would not contribute to any

increase in revenue, also it will claim depreciation of $6000 per year and after 5 years, It

would be a scrap and would be sold for only $5000 bucks.

 Secondly the safety issues concerned with this machine (its sensitive nature towards

angle of the timber and its tendency to kick back severely increase lumber is not correctly

positioned and even you are reluctant to allow other staff members to use this machine). So, it

can be a possibility it can harm any labour in later stage. In order to make sure employee

safety, we strongly recommend him to take necessary steps to make every employee get

trained on how to use the machine in a proper way. We recommend him to conduct training

sessions from expert every month, explain the correct usage of the machine is good safety

measure they can take to make sure no one hurt severely.

On the other side, new machine offered an increase in capacity of 40 percent. In

addition, it allowed possibility of obtaining some custom works for a specialist woodcrafter,

which can furthermore help in to increase sales, as a customised work can generate more

profit than a regular item. In order to make use of the increased capacity, we recommend

Magic company to conduct survey to find out what customers expecting new things and new

designs. Based on the requirement, we recommend him to hire expert in custom designers to

generate state-of-the-art design which will attract more customers.

Even interest-only repayment for five years (the bank loan of 6 percent per annum)

and the flexibility of repaying the full principal at the end of the loan period also eases the

debt problem as the amount that would be received upon selling the older one ($35000) could

be directly used to pay interests rate for four years (.06 * 1,05000 = 6300 , 6300* 4 =

25200) .This means that you have complete four years to begin your actual payments for this

machine and I don’t think so that in these four years , with increase in capacity of 40

percent , it will be difficult to manage the repayment of this machine. Even considering the

worst-case scenario (even though probability of this scenario to occur is low), it could be sold

out for $ 60, 000. With this proceeding from the old machine, we highly recommend him to
invest on any fixed assets like machinery which will help them to ease of doing business and

reduce the labour cost.

Also, another advantage is the technical advancement of Delta over Matrix which

would consequently lead to significant savings in both labour and electricity costs which are

$ 5250 ( 10 percent of $ 30 * 35 * 50 where 35 hours a week and 50 working weeks in an

year) and $ 4725 ( 10 percent of $ 5.625 * 24*7*50 where 24 hours a day,7 days a week and

50 working weeks) respectively in the first year. Even this labour and electricity saving will

increase each year by fixed $ 250 and $ 75 respectively. Furthermore, the seller of the Delta

being in a competitive market is willing to negotiate in terms of maintenance plan.

Minimal amount of $2000 for the maintenance (compared to the capacity it would

increase) and just a $1000 increase per year, also to be paid not in advance but at the end of

the year also falls in line with the purchase of new machine. Even the forecast Revenue and

net profit indicates the continuous decline which will one day lead to the liquidation of the

Magic. There is no denying that slow tourism market, decrease in population growth and

infrastructural issues effect the overall business, but we should also consider the fact that

Queensland Sunshine coast still remain one of the “Fastest Growing “regions which is

undoubtedly a light of hope in this dark economic environment. We highly recommend him

to stick to the basic business strategy to do the business though there are more competitors

emerged into the market. We strongly recommend him to introduce new products in to the

production by doing survey with the most valuable customers. In that way Magic company

will be in competition with the competetors. Even the recent establishment of Bunnings

Warehouse store in the area (relatively recent as compared to magic’s establishment in 1999)

also signifies a better scope of business in the upcoming years because these big

organizations hire a team of Analysts at the backend and no new branch is settled up UNTILL
AND UNLESS surveys are done and Future predictions of sales turns out to be positive on

the bases of data and statistics.

And we believe buying this machine would prove to be a good decision and would

help his company to stay solvent and survive in the market.

CONCLUSION: To summarize, we can say that David should go for wood cutter finisher

because keeping same machine will also require large amount of money and requires 7000

every year for repair. on the other hand , new machine also offered an increase in capacity of

40 percent and allows possibility of some custom works which also help to increase in sale as

customized items can generate more profit that the regular ones. He should also provide

proper training to employees that how to use the machine due to the safety issued concerned

with machine i.e. sensitivity towards angle of the timber and its tendency to kick back

severely increase lumber is not correctly positioned .We highly recommend him to conduct

monthly training sessions from experts . The technical advancement of Delta will also lead to

significant saving in labour and cost in respective five years. In end we can say that buying

new machine is a good decision and would help the company to survive in the market and

stay solvent.
Appendix – I.A DISCOUNTED AT 11%
Discounted at
OLD MACHINE
11%

Period 0 1 2 3 4 5
Operating
Expenses
Labour -52500.00 -52500.00 -52500.00 -52500.00 -52500.00
Electricity -47250.00 -47250.00 -47250.00 -47250.00 -47250.00
Maintenance -28000.00 -7000.00 -7000.00 -11000.00 -7000.00 -7000.00
Salvage value 5000.00
- -
Cost before tax -28000.00 -106750.00 -106750.00 -101750.00
110750.00 106750.00
Cost after tax -19600.00 -74725.00 -74725.00 -77525.00 -74725.00 -71225.00
Depreciation
6000.00 6000.00 6000.00 6000.00 6000.00
expense
Depreciation
0.00 1800.00 1800.00 1800.00 1800.00 1800.00
tax shield
Total cost -19600.00 -72925.00 -72925.00 -75725.00 -72925.00 -69425.00
Discount Factor 1.00 0.90 0.81 0.73 0.66 0.59
Total cost
discounted @
-19600.00 -65698.13 -59185.93 -55370.12 -48035.70 -41203.74
11% (Present
value)
Annual Cash
-289093.62
Operating cost
Appendix 1.B
Discounted at
NEW MACHINE
11%

Period 0 1 2 3 4 5
Operating
Expenses
Labour -47250.00 -47000.00 -46750.00 -46500.00 -46250.00
Electricity -42525.00 -42450.00 -42375.00 -42300.00 -42225.00
Maintenance -2000.00 -3000.00 -4000.00 -5000.00 -6000.00
Interest -6300.00 -6300.00 -6300.00 -6300.00 -6300.00
Principal
-105000.00
payable
Salvage value 60000.00
Cost before tax 0.00 -98075.00 -98750.00 -99425.00 -100100.00 -145775.00
Cost after tax 0.00 -68652.50 -69125.00 -69597.50 -70070.00 -102042.50
Depreciation
16000.00 16000.00 16000.00 16000.00 16000.00
expense
Depreciation
0.00 4800.00 4800.00 4800.00 4800.00 4800.00
tax shield
Total cost 0.00 -63852.50 -64325.00 -64797.50 -65270.00 -97242.50
Discount Factor 1.00 0.90 0.81 0.73 0.66 0.59
Total cost
discounted @
0.00 -57524.72 -52206.17 -47379.93 -42993.35 -57713.42
11% (Present
value)
Annual Cash
-257817.59
Operating cost
Appendix I.C
Old Equipment
Remaining life 5
Current salvage value 35000.00
Salvage value in 5 years 5000.00
Discounted Annual Cash Operating costs 289093.62
New Equipment
Cost 140000.00
Estimated useful life 5
Salvage value in 5 years 60000.00
Discounted Annual Cash Operating costs 257817.59

Initial investment 105000.00

Net Savings 31276.03

Payback year 3.36
Internal Rate of Return 3.35720 15%
Annual Rate of Return 12%
Net Savings non
28037.50
discounted
Profitability Index 2.46

Appendix-1. D

NPV Calculation at DF 11%

115593.
Present value of annual cash inflows 31276.03 3.6959 1
Salvage value 60000 0.59345 35607
Capital investment 5000-140000 -135000
16200.0
Net Present Value 8
16200
5 years at 11%, PV of ordinary annuity
 Appendix 2.A - DISCOUNTED AT 12%
Discounted at 12% OLD MACHINE

Period 0 1 2 3 4 5
Operating
Expenses
Labour -52500.00 -52500.00 -52500.00 -52500.00 -52500.00
Electricity -47250.00 -47250.00 -47250.00 -47250.00 -47250.00
Maintenance -28000.00 -7000.00 -7000.00 -11000.00 -7000.00 -7000.00
Salvage value 5000.00
Cost before tax -28000.00 -106750.00 -106750.00 -110750.00 -106750.00 -101750.00
Cost after tax -19600.00 -74725.00 -74725.00 -77525.00 -74725.00 -71225.00
Depreciation
6000.00 6000.00 6000.00 6000.00 6000.00
expense
Depreciation tax
0.00 1800.00 1800.00 1800.00 1800.00 1800.00
shield
Total cost -19600.00 -72925.00 -72925.00 -75725.00 -72925.00 -69425.00
Discount Factor 1.00 0.89 0.80 0.71 0.64 0.57
Total cost
discounted @ 12% -19600.00 -65111.82 -58135.08 -53899.54 -46345.30 -39393.83
(Present value)
Annual Cash
-282485.56
Operating cost
Appendix 2.B
Discounted at
NEW MACHINE
12%

Period 0 1 2 3 4 5
Operating
Expenses
Labour -47250.00 -47000.00 -46750.00 -46500.00 -46250.00
Electricity -42525.00 -42450.00 -42375.00 -42300.00 -42225.00
Maintenance -2000.00 -3000.00 -4000.00 -5000.00 -6000.00
Interest -6300.00 -6300.00 -6300.00 -6300.00 -6300.00
Principal payable -105000.00
Salvage value 60000.00
Cost before tax 0.00 -98075.00 -98750.00 -99425.00 -100100.00 -145775.00
Cost after tax 0.00 -68652.50 -69125.00 -69597.50 -70070.00 -102042.50
Depreciation
16000.00 16000.00 16000.00 16000.00 16000.00
expense
Depreciation tax
0.00 4800.00 4800.00 4800.00 4800.00 4800.00
shield
Total cost 0.00 -63852.50 -64325.00 -64797.50 -65270.00 -97242.50
Discount Factor 1.00 0.89 0.80 0.71 0.64 0.57
Total cost
discounted @
0.00 -57011.34 -51279.25 -46121.56 -41480.39 -55178.31
12% (Present
value)
Annual Cash
-251070.86
Operating cost

Appendix 2.C

Old Equipment
Remaining life 5
Current salvage value 35000.00
Salvage value in 5 years 5000.00
Discounted Annual Cash Operating costs 282485.56
New Equipment
Cost 140000.00
Estimated useful life 5
Salvage value in 5 years 60000.00
Discounted Annual Cash Operating costs 251070.86
Initial investment 105000.00

Net Savings 31414.70

Payback year 3.34

Internal Rate of Return 3.34238 15%
Annual Rate of Return 12%
Net Savings non discounted 28037.50
Profitability Index 2.39

Appendix-2.D
NPV Calculation at DF 12%
113244.
Present value of annual cash inflows 31415 3.60478
2
Salvage value 60000 0.56743 34045.8
Capital investment 5000-140000 -135000
12289.9
Net Present Value
6
12290
5 years at 12%, PV of ordinary annuity

Appendix-3.A

Discounted at 11% NEW MACHINE

Period 0 1 2 3 4 5
Operating Expenses
Labour -47250.00 -47000.00 -46750.00 -46500.00 -46250.00
Electricity -42525.00 -42450.00 -42375.00 -42300.00 -42225.00
Maintenance -2000.00 -3000.00 -4000.00 -5000.00 -6000.00
Interest -6300.00 -6300.00 -6300.00 -6300.00 -6300.00
Principal payable -105000.00
Salvage value 80000.00
Cost before tax 0.00 -98075.00 -98750.00 -99425.00 -100100.00 -125775.00
Cost after tax 0.00 -68652.50 -69125.00 -69597.50 -70070.00 -88042.50
Depreciation
12000.00 12000.00 12000.00 12000.00 12000.00
expense
Depreciation tax
0.00 3600.00 3600.00 3600.00 3600.00 3600.00
shield
Total cost 0.00 -65052.50 -65525.00 -65997.50 -66470.00 -84442.50
Discount Factor 1.00 0.90 0.81 0.73 0.66 0.59
 Total cost discounted
0.00 -58605.80 -53180.09 -48257.37 -43783.79 -50116.62
@ 11%
Annual Cash
-253943.67
Operating cost

Appendix-3B

Old Equipment
Remaining life 5.00
Current salvage value 35000.00
Salvage value in 5 years 5000.00
Discounted Annual Cash Operating 289093.6
costs 2

New Equipment
140000.0
Cost 0
Estimated useful life 5.00
Salvage value in 5 years 80000.00
Discounted Annual Cash Operating 253943.6
costs 7

Initial investment 105000.00

Net Savings 35149.95

Payback year 2.99

Internal Rate of Return 2.98720 21%
Annual Rate of Return 22%
Net Savings non
discounted 36037.50
Profitablity Index 2.42

Appendix-3.C

NPV Calculation at DF 11%

Present value of annual cash inflows 35150 3.6959 129911
0.5934
Salvage value 47476
80000 5
5000- -
Capital investment
140000 135000
16200.
Net Present Value
1
 5 years at 11%, PV of ordinary annuity

Appendix-4.A

Discounted at 12% NEW MACHINE

YEAR 2016 2017 2018 2019 2020 2021

Period 0 1 2 3 4 5
Operating Expenses
Labour -47250.00 -47000.00 -46750.00 -46500.00 -46250.00
Electricity -42525.00 -42450.00 -42375.00 -42300.00 -42225.00
Interest -6300.00 -6300.00 -6300.00 -6300.00 -6300.00
Principal payable -105000.00
Maintenance -1000.00 -2000.00 -3000.00 -4000.00 -5000.00
Salvage value 80000.00
Cost before tax 0.00 -97075.00 -97750.00 -98425.00 -99100.00 -124775.00
Cost after tax 0.00 -67952.50 -68425.00 -68897.50 -69370.00 -87342.50
Depreciation expense 12000.00 12000.00 12000.00 12000.00 12000.00
Depreciation tax shield 0.00 3600.00 3600.00 3600.00 3600.00 3600.00
Total cost 0.00 -64352.50 -64825.00 -65297.50 -65770.00 -83742.50
Discount Factor 1.00 0.89 0.80 0.71 0.64 0.57
Total cost discounted @
0.00 -57457.77 -51677.84 -46477.45 -41798.15 -47518.01
12% (Present value)
Annual Cash Operating
-244929.23
cost

Appendix-4.B

Remaining life 5.00

Current salvage value 35000.00
Salvage value in 5 years 5000.00
Discounted Annual Cash Operating costs 282485.56

Cost 140000.00
Estimated useful life 5.00
Salvage value in 5 years 80000.00
 Discounted Annual Cash Operating costs 244929.23

Initial investment 105000.00

Net Savings 37556.33

Payback year 2.80

Internal Rate of Return 2.79580 23%
Annual Rate of Return 25%
Net Savings non discounted 39537.50
Profitability Index 2.33

Appendix-4.C
NPV Calculation at DF 12%
3.604 135384.
Present value of annual cash inflows 37557
78 7
0.567
Salvage value 80000 45394.4
43
Capital investment 5000-140000 -135000
45779.1
Net Present Value
2

5 years at 12%, PV of ordinary annuity

Appendix: SWOT Analysis.

Strengths:

Having good knowledge on the business and forecasting future of the business is

owners’ major advantage. Another advantage is that they specialized in packs of “seconds”

timber that was sold to the retail market at discounted prices. The business was successful

and eventually outgrew the small premises. Major positive area is that they are capable to

store the hardware supplies in the store and able to purchase their own new truck to picking

up the products in to store and provide the delivery service to the customers. Also, they

invested in wide range of machineries. They purchase second-hand machinery instead of new

machines which is also good decision to not invest huge amount on brand new machines.
Their ability to maintain the business with limited staff and they work themselves as staff,

one other permanent employee, and two casual employees who would work on an on-call

basis, as demand required. The timing of its growth was fortuitous because the Sunshine

Coast was undergoing a rapid residential building expansion in response to a 10 per cent per

annum population growth in 2002, 2003, and 2004.2 During this growth phase for the

company, Magic earned a reputation for being a supplier of discount products, and soon, the

company had acquired a substantial core of builders as its customers. While a number of

similar-sized competitors left the market, thanks to Davidson’s experience and the company’s

significant stock holding, Magic was able to stay solvent.

Weaknesses:

Major drawback to the Magic company is to reduce Magic’s stock levels, replacing

them only as the market demanded rather than holding a diverse range. Not surprisingly, this

approach to inventory control meant that some customers shopped elsewhere since Magic did

not stock what they needed to purchase. Another drawback is the older timber equipment was

showing its age and becoming more troublesome, the large finisher. To replace old machine

magic owners requires huge investment to purchase new machine

Opportunities:

Though there were a slowdown in the tourism industry, and a decrease in population

growth, the Sunshine Coast remained one of Australia’s fastest-growing regions. Owner’s

ability to add new production line steel to the Magic’s production line.

Threats:

Company was facing a major threat from several reasons, including infrastructure

issues on the coast, a slowdown in the tourism industry, and a decrease in population growth.

Increased competition from a large Australian publicly listed retailer, Wesfarmers Limited is
another major threat to the magic timber company. As a result of the declining economic

environment, a number of builders who held accounts with Magic went into liquidation,

leaving the company with bad debts that had to be written off or placed on payment plans, a

situation that had a significant impact on Magic’s own financial situation is another critical

issue faced by the company.