EM 4001 Strategic Finance
Financial analysis and evaluation report Edit by: ZHIGAO XU
As the company become more and more successful, expansion would be the vital step for increase the profitability and competitive. Therefore, the board of directors expected to see a detailed financial report for the new project idea about the next generation of mobile phone. At the end of the report, I would able to declare which scenario is the best in financial term and which one has greater profitability. Also provide my own opinions of this project. There are three analysis applied in this report, to investigate, compare and evaluate the advantages and disadvantages of each scenario. Through these investigations, I would able to find the NPV, IRR and EV for all scenarios and so that able to utilise them to find the outcomes. As the result, the second scenario holds the most advantages. It is highly profitable, less risks and less likely of uncertainty occurs.
Gravity Industry Ltd. emerged a decade ago in south China while smart phone has became prevalent. The main mission of the company were produce and design smart phone shells using aluminium and carbon fiber. Through a decade development, today it becomes a mature company has two medium size factory allocates around the country. Owned more than 300 employees working through the production flow line, able to produce over 5,000 phone shells per day. The company collaborates with several well known brand in China. Over the past three years the company found an opportunity to explore business to the oversea market to Latin America and Middle
East. To analyse the performance the company has made, it became profitable after three years operation, and the company growth rapidly after that. According to the annul preview shown the profit increased around 15% every year when it was profitable. Due to the business currently entre the oversea market, the profit increases dramatically around 35% per year over the last three years. Hence, the company has a healthy cash flow condition.
The company is taking consideration of expand the business to increase profitability
and competitive. The idea of the project is about developing the next generation of mobile phone. The project has divided in three scenarios, risks are vary, the amount of investment is different and each scenario has a four year life.
Methodology for the analysis
This project mainly adopts three fundamental analyses to investigate whether the project is worth to invest and which scenario should be apply. They are discount cash flow analysis, internal rate of return (IRR) and the expected value analysis.
First of all, there are a few definition need to be introduce in order to understand the theory of this analysis. Hurdle rate defined as the minimum expected rate of return from a investment required by the investors. ("Hurdle rate", 2014)The implication of discounted cash flow describes as the amount of cash agreed today to be equivalent to some future cash amount. It is a technique used to compare expenses and profit in different time period. ("Discount rates and net present value",2013) Involves one principle concept that the money today is worth more than money in the future, and because the money today could be invest to other business or use to any other purpose.
(Carnell,2014) Relatively, the equation of discount cash flow is shown as: DPV =
(1 + r)n where DPV is the discounted present value, FV is the future value that
expected to return in the future year. 1 (1 + r)n is the discount factor, that term "r" states the discount rate, it is direct proportion to the risk level of the investment. The higher the risk of a project the higher the discount rate. "n" relates with the number of year of the investment. (Evans. 2011)In order to determine whether the project is worth to…