uc During your financial projection for the next three years, you found out that
ID: 2429106 • Letter: U
Question
uc During your financial projection for the next three years, you found out that the sales figures (market size) of all of your competitors for a product in 2018 were $100 million, as shown in the table below. Assume the following: 1. A market study report for this product showed that the market is growing at the rate of 10% per year. You have estimated ofthe market size and it will be 5% and 7% ofthe market size for the years 2020 and 2021, respectively. The manufacturing cost is estimated to be 40% of the total operating revenues. At the end of year 2018, your company will purchase equipment worth one million dollars taken from a bank loan. The loan will be paid back to the bank in three equal end of year payments starting at the end of year 2019 with an effective compound interest rate of 12% per year. Your company is planning to use the equipment for 8 years, and the equipment will start depreciating in year 2019 and will have no salvage value at the end of the useful life. 2. that your company's total operating revenues in 2019 will be 1% 3- 4 5. The operating expenses are 35% of the total operating revenues. ' Il in the table below to calculate your company's net is a profit. When calculating the t profit ignore the cost of interest of the loan. 2018 2019 2020 2021 (in Millions of S) (in Millions of S) in Millions of S) (in Millions of S) et Sizein 100 ting Revenues cturing cost rofit tion cost yments expenses
Explanation / Answer
Working Notes
1. Since market size increases by 10% every year from $100 million in 2018, it will be $110 in 2019 (100*1.1), $121 in 2020 (110*1.1), $133.1 in 2021 (121*1.1). This is compounding the current market size by 10% each year.
2. Operating revenues is calculated by taking the given percentage of company's market share for each year. [ For example in 2021 company will have operating revenue of 9.317 which is 7% of 133.1]
3. Manufacturing cost is calculated by taking 40% of the operating revenue calculated above.
4. Gross Profit is calculated just by subtracting the manufacturing cost from the operating revenues.
5. Since the purchased machinery is to be used for 8 years, starting from 2019 and there is no salvage value left after 8 years, the annual depreciation cost will be cost of machine divided by 8 years. This will be $0.125 million a year ($ 1 million / 8 years).
6. The equated annual installment can be calculated by this formula.
Loan amount = Installment * [(1+i)-1+(1+i)-2+(1+i)-3]
Loan amount = $1 million, i=12% or 0.12 and we have to find the installment.
So, $1 million = Installment *[(1.12)-1+(1.12)-2+(1.12)-3]
Installment = $ 1 million / 2.40183 = $0.4163 million
7. Operating expenses are calculated by taking 35% of operating reveues calculated in point 2.
8. Net profit is calculated by subtracting Depreciation cost and operating expenses from Gross profits.
Note:- Loan amount repaid is not to be taken as expense as it is a financing cost. Further, taking the loan amount will lead to double counting as the depreciation amount has already been considered.
2018 2019 2020 2021 Market Size 100 110 121 133.1 Operating Revenue 1.1 6.05 9.317 Manufacturing Cost 0.44 2.42 3.727 Gross Profit 0.66 3.63 5.59 Depreciation Cost 0.125 0.125 0.125 Loan Repayment 0.4163 0.4163 0.4163 Operating Expenses 0.385 2.1175 3.261 Net Profit 0.15 1.3875 2.204Related Questions
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