MBA YP53 & YP54

ITB School of Business and Management

Young Proffesional Lead the Future

INSTITUTE of TECHNOLOGY BANDUNG

MM602
Investment Project Analysis

Final Exam

Student Name: Wulan C. Lestari

Student ID: 29115628

1st Semester 2016/2017

MASTER OF BUSINESS ADMINISTRATION
School of Business & Management
INSTITUTE TEKNOLOGI BANDUNG
 EXECUTIVE SUMMARY

I. Objective
In early 2016, Mr. Suger Hu, an analyst in the Marketing and Sales Group of the Tongli
Mechanical and Electronic Group Co., Ltd., had to recommend to the division sales manager,
Bruce Kho, the terms under which Tongli would lease one of its advanced systems to
WANDITEX Knitting Factory in Bandung, Indonesia, a highend fashion garment. The
problem of analyzing and setting lease terms was relatively new to Suger and had arisen only
a month earlier, when WANDITEX informed Suger and Bruce that its pending purchase of
the factory-automation system had been put on indefinite hold. WANDITEX's CEO had just
ordered a moratorium on any capital expenditures that might negatively affect WANDITEX's
income statement and balance sheet. Wanditexs objectives are maintaining leadership in
market share, increase sales by 15% per year, and achieves targets for net income and
working capital turnover.

Suger discussed with Tongli's division executives the variety of ways a firm to acquire the
use of a Tongli Automated Factory System. First, the customer could purchase a system with
cash or with borrowed funds, either unsecured or collateralized by the equipment. Second, the
firm could acquire the equipment through a conditional sale in which the title would pass to
the firm upon receipt of the final payment. Finally, the customer could lease the equipment
in one of two ways: (1) via a cancelable operating lease, which would carry a term that was
less than the economic life of the property; or (2) via a noncancelable financial capital lease
that would span the entire economic life of the property. Tongli Automation had never before
offered leasing and was unfamiliar with the actual workings of leasing arrangements.

When WANDITEX was reviewing system proposals from Tongli, SHIMA SEIKI and Marui
Textile Machinery, Suger and Bruce learned from WANDITEX that all three systems were
roughly equivalent but differed in pricing.

Although Suger guessed that WANDITEX had about the same borrowing cost as Tongli, he
suspected that WANDITEX was in a lower tax bracket. Suger decided to run some sensitivity
analyses with a zero marginal tax rate. With such a low tax rate, WANDITEX could not fully
exploit the tax savings on interest and depreciation. Small- and medium-sized firms probably
paid higher interest rates than Tongli and could save money if Tongli financed the equipment
and passed on some of the financing savings to them. Leasing terms might be adjusted to
exchange tax benefits for lower lease rates. Suger's analysis used the after-tax cost of debt as
the discount rate, but Suger thought he might want to use a higher discount rate, perhaps the
weighted-average cost of capital, based on the greater risk involved with leasing high-
technology equipment. A thorough sensitivity analysis based on various discount and tax
rates might help to determine under what circumstances a customer might want to lease. With
a variety of options and scenarios to propose to WANDITEX, depending on actual tax and
hurdle rates, Suger believed that Tongli had a good chance of resurrecting the deal and
meeting its sales goals for 2017. Moreover, this experience would assist Tongli in offering
lease proposals to its future customers. As the CFO of WANDITEX, we have to submit
business plan proposal for year 2017 which the best investment would be better to increase
shareholder wealth.

II. Analysis

As Wanditexs CFO, I have been preparing and analyzing any leasing or borrowing
scenarios that would help us to choose which offering that we should choose. Based on the
objectives above, we know that Tonglis team themselves have been offering four different
leasing options, which we assume that the other companies are offering as well.
1. Leasing vs Borrowing

Borrowing (loan) is not an option that I would be suggesting for Wanditex for the
amount of interest that should be paid itself is already 15% of the amount of loan we
would be receiving. If we would get $640,000 loan, the interest that we should be
paying is already $213,059. Based on that, we would cross the loan option off the list.
 2. Tongli vs Shima Seiki vs Marui Textile Machinery

Based on the table shown above, we could tell that leasing option #1 from Tongli shows the
highest advantage over buy and borrow. We could also tell that when the effective tax rate
equals to 0, the increase of cost of debt will give more leverage on leasing. Marui Textile
Machinery is the least competitive in any scenario. It also shows that Shima Seikis offering
shows the highest advantage over buy and borrow as well, and absolutely the main
competitor for Tongli.
 3. Investment Options

Wanditex is not only preparing for leasing or borrowing to expand its technology to lead the
textile industrly, its also simutaneously going to invest in either property sector, automation
existing plan or marketable securities. The objective to invest on a project is to look at the
highest EAA and IRR to gain as much profit as possible. If we look at the table above, we
could tell that investing in Automation Existing Plan could possibly reach our objectives.

III. Conclusion and Recommendation

3.1 Conclusion
Based on the analysis above, I conclude that we should pick the lease offering that fulfill our
objectives such as; maintaining leadership in market share, increase sales by 15% per year,
and achieves targets for net income and working capital turnover, I would choose either
Shima Seikis leasing offering in any scenarios (or the second scenarion if the lease
advantage over buy and borrow does matter), or choosing Tonglis lease option #1 in any
scenario. With the option chosen above, its possible for Wanditex to invest on Automation
Existing Plan.

3.2 Recommendation :
My recommendation as Wanditexs CFO would be Tonglis lease option #1 and investing on
Automation Existing Plan.