Vlad Caciuloiu

Grupa 1 FAIMA, Managent of digital enterprise

Financial Management

Homework 2

Substantiating the decision of financing projects

Capital Budgeting

Structure

Project description and sizing necessary investment (0,2)

Sources of funding and cost of capital required to finance the project (0,5)
Identifying of revenue and their projection on predictable time horizon (0,3)
Identifying costs and their projection on predictable time horizon (0,5)
Describing cash-flows (1)
The determination of NPV and the analysis of the result obtained (2)
The determination of IRR / IRRM and the analysis of the result obtained (1)
The determination of the profitability index (PI) and the analysis of the result obtained (2)
The determination of payback period (PB) and the analysis of the result obtained (2)
Financial risk analysis (sensitivity analysis)
Substantiating the decision to invest or not in the analised project (0,5)

Deadline: 24.05.2017

Observations:
a) All calculations for NPV, IRR, PI, PB will be done using EXCEL.
b) The homework will be uploaded on the Moodle platform in WORD format together with an
EXCEL document containing all calculations.

Company Studied : S.C. Hesperis Distribution Group

 1. Project description and investment sizing.

Company wants to invest in new products so that it can expand into other
supermarket chains around Romania. To do so, the company must invest in a rather
big stock of products so that it has presentation material and enought stock to start
doing business without wasting time on import, transportation and logistics, while
still offering the best price available on the market because of big stockpile.

Because of the big demand on the market for FMCG (Fast moving consumer
goods)at good prices , company will try and import high value branded products
(Nestle, Mondelez, Ferrero, Storck, Jacobs, Lavazza) and build stock on each
assortment needed.

This endeavor requires an investment of around 125000 euros per truck-load of

goods, prices may vary slightly from one product to another (coffe is more
expensive than chocolate for example), and the price variation will be visible from
the pallet price standpoint. Difference of prices for said goods will have a margin of
10% more expensive goods when it comes to coffe, leaving the initial investment at
around 504000 euros.

2. Sources of funding and cost of capital required to finance the project

This company already operates on a credit line of aproximately 500000 euros per
month, so this credit line must be enlarged to accomodate the companies need to
enlarge its activity. ......

3. Identifying of revenue and their projection on predictable time horizon

Revenue needed for this project will be loaned from the bank. The investment will
be made for a perioad of 4 years, in each year the company will invest different
amounts of money into new products each year. The I V will be 250000 EUROs,
followed in each subsuquent year by 200000 EUROs, 145000 EUROs, 100000
EUROs and finally, 450000 EUROs.

4. Identifying costs and their projection on predictable time horizon

Costs of this project will not differ from regular operating costs. Furthermore, the
logistics and warehousings cost will decline while the project is ongoing because of
the large volume of goods that were ordered and the discounts issued for the
respective quantities.

5. Describing cash flow

Cash flow during project implementation will rise because of the high value
products that will be brought into the companies catalogue. Because of the
investment into stocks and the buffer stocks that the company will purchase, a part
of the investment will be blocked into stocks, and so, for the first couple of months
into the implementation period company liquidity will decrease, but after the
products will be presented and the distribution of said stocks will start, company will
benefit from a major cash flow update.

As ive mentioned earlier, afte the initial investment of 213 000 Euros,
estimated cash flows for the next 4 years will be 50 000 euros in year 1, 78000
euros in year two, 68 000 euros in year 3 and 90 000 euros in year 4 of the
projects implementation.

6. The determination of NPV and the analysis of the result obtained

Ive calculated the NPV for this investment using the formula NPV = {Net Period
Cash Flow / (1+R)T} - Initial Investment. The resul was an NPV of 12578.3365,
meaning that such an investment has a good net present value and should be
considered for implementation.

7. The determination of IRR / IRRM and the analysis of the result obtained
Ive calculated the IRR for this investment using the same formula of calculation for NPV, but with
NPV=0 and calculated the value for R. Calculations have shown that the Irr for this investment is 10%,
which is a very good percentage for this investment.
8. The determination of the profitability index (PI) and the analysis of the result obtained
NPV
Ive calculated the profitability index using the formula Iv , where NPV has been

calculated in 6. and Iv represents the value of the initial investment. This

means that the profitability index (PI) equals 5.59%, which is not such a high
value, but acceptable.
9. Determination of payback period and the analysis of the result
obtained
This is by far a long term investment, and the payback period for this
investment is the hole 4 years, and the profit is obtained only at the end.
10. Substantiating the decision to invest or not in the analised project
After the calculations and determination of NPV, IR, PI and PB, Ive come to the conclusion that this kind
of investment is a risky one, and for the results that it yields, as a Pi of not even 6% and a payback period
of 4 years, this investment is not worth making, even if it has a good Net Present Value. If the company
had more money to invest and better cash flow, the result would have been different.