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8/2/2019 6050 Group Project Report v4.0
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Project: New Computer
Product
City University of Hong Kong
Department of System Engineering and Engineering
Management
MEEM 6050 Engineering Economic Analysis (Semester A,
2011-12)
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Student Name Student number
LU Shan 52541490
LI Xi 52410662
XU Sha 51982297
CHEN Pengyu 52472302
YAO Mo 52467562
REN Yanling 52302337
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Abstract
The company depends on their current finance situation to set objectives to make our
company as one of the listed companies in Hong Kong. To achieve this aim, our
company designs two types of PC products. According to break-even analysis,
sensitivity analysis and scenario analysis, we find the break-even point of demand and
the different IRR of two products. To make the best profits, we choose product two
eventually.
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Table of Contents
1 Introduction...........................................................................................................2
2 Problem Definition................................................................................................2
3 Setting Objectives..................................................................................................2
4 Financial Statements.............................................................................................2
4.1 Balance Sheet.........................................................................................2
4.2 Income Statement....................................................................................2
4.3 Cash Flow Statement................................................................................2
4.4 Debt Management Analysis........................................................................2
4.5 Liquidity Analysis....................................................................................2
4.6 Asset Management Analysis.......................................................................2
4.7 Profitability Analysis................................................................................2
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5 Alternative Identification, Evaluation and Selection (Computer)....................2
5.1 Alternative Products.................................................................................2
5.2 Marketing Strategy...................................................................................2
6 Alternative Identification, Evaluation and Selection (Finance)........................2
6.1 Alternative Selection................................................................................2
6.2 Bank loan offer and Selection.....................................................................2
7 Risk Management..................................................................................................2
7.1 Break Even Analysis.................................................................................2
7.2 Sensitivity Analysis..................................................................................2
7.3 Scenario Analysis....................................................................................2
7.4 Recommendation.....................................................................................2
8 Conclusion..............................................................................................................2
Conclusion
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1 Introduction
Ocean is a computer manufacturing company, established by LU Shan, XU Sha, LI
Xi, REN Yanling, YAO Mo, and CHEN Pengyu in November 2009. Headquartered in
Hong Kong, the company has a production factory, in which have totally 5
departments and 100 workers. The objective of our company is to become one of
listed companies in Hong Kong after 5 years. We want to attract some external
investors to invest our business, and the proposal of our company development as
follows.
2 Problem Definition
Based on Hong Kong business circumstance nowadays, the competitive situation is
much harsh than the previous one we understood, especially for computer and
electronic industries. For long-term development to achieve the organizational goals,
we are facing following problems:
To develop new products to capture market share;
Lack of initial capital for the new products R&D and manufacture.
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1 Setting Objectives
As mentioned above, we have the aim and mission to fulfill. There is no doubt that,
Hong Kong is a perfect place to start up an industry, even several economic crisis still
leaves impacts on the financial market. We already have factory plant, manufacturing
line, material and component supplier, and human resources, both engineers and
salesman included. Thus, we definitely have the plan to develop a brand new product
that can take over percentages of computer market, and establish a sustainable
developed company image in the long run.
Our aim is to make our company as one of the listed companies in Hong Kong. As
Hong Kong market has long history, it has high requirement and reputation to the
candidate companies. If we want to be the listed company, several requirements and
objects we have to fulfill at one, before we enjoy the benefit from Hong Kong stock
market, such as credit extending.
Therefore, we set up four targets:
Net income of the first year should above 2 million HKD;
Total income of three years should above 5 million HKD;
Gross margin should above 25% or more;
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Net after-tax profit should above 15% of sales income.
1 Financial Statements
As it is a 2-year running company, first and foremost, we tend to show the financial
statements of past 2 years and give a brief analysis for our financial status.
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in HK dollars (000)Period Ending year 1 year 2
Assets
Current Assets
Cash And Cash Equivalents 8,884 11,281
Short-Term Investments 5,732 11,894
Net Receivables 4,570 5,843
Inventories 359 484
Other Current Assets 1,342 3,363
Total Current Assets 20887 32865Long-Term Investments
Property Plant and Equipment 1,739 2,332
Goodwill 36 197Intangible Assets 363 334
Accumulated Amortization
Other Assets 998 609
Deferred Long-Term Assets Charges 84 1,166
Total Asset 24,107 37,503
Liabilities
Current Liablities
Accounts Payable 6,019 9,568
Short/Current Long-Term Debt
Other Current Liabilities 3,568 6,921
Total Current Liabilities 9,587 16,489Long-Term Debt
Other Liabilities 798 985
Deferred Long-Term Liability Charges 5,026 6,952
Minority Interest
Negative Goodwill
Total Liablities 15,411 24,426Stockhoders' Equity
Preferred Stock
Common Stock 5100 6818
Retained Earnings 8646 13153
Treasury Stock
Capital Surplus
Other Stockhoder Equity 60 7.6
Total Stockholder Equity 13806 19978.6
BALANCE SHEET
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Table 4.1 Balance Sheet
4.2 Income Statement
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in HK dollars (000)
Period Ending year 1 year 2
Total Revenue 22,806 30,855Cost of Revenue
Direct labor4,120 5,572
Material 3,568 4,765
Overhead 3,335 4,230
Depreciation 4,036 5,700
Tatal Cost of Revenue 15,059 20,267
Gross Profit 7,746 10,588Operiating Expenses
Research Development 1,503 1,054
Selling Generaland Administrative 2,815 3,573
Operating Income or Loss 3,428 5,961Income from Continuing Operations
Total Other Income/Expenses Net 569 589
Earning Before Interest And Taxes 3,997 6,550Interest Expense 0 0
Income Before Tax 3,997 6,550
Income Tax Expense 660 1,081
Minority Interest - -
Net Income 3,337 5,469
INCOME STATEMENT
Table 4.2 Income Statement
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4.3 Cash Flow Statement
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in HK dollars(000)
Period Ending year 1 year 2
Cash flows fromoperatingactivities
Net income 3337 5469
Items not requiring an outlay of cash:
Depreciation, Depletion & Amortization 301 450
Depreciation and Depletion 237 345
Amortization of Intangible Assets 64 105
Deferred Taxes & Investment Tax Credit 74 -350
Deferred income taxes 74 -350
Investment Tax Credit 0 0
Stock-based compensation
Other Funds 241 511
Net changes in working captial items 1264 3914
Net cash provided by operatingactivities 5217 9994Cash flows fromfinancingactivities
Cash Dividends Paid - Total 0 0
Common Dividends 0 0
Preferred Dividends 0 0
Change in Capital Stock 344 341
Repurchase of Common & Preferred Stk. -3 -118
Sale of Common & Preferred Stock 347 459
Proceeds from Stock Options 0 0
Other Proceeds from Sale of Stock 347 347
Issuance/Reduction of Debt, Net 0 0
Change in Current Debt 0 0
Change in Long-Term Debt 0 0Issuance of Long-TermDebt 0 0
Reduction in Long-Term Debt 0 0
Other Funds 358 719
Other Uses 0 0
Other Sources 358 719
Net cash provided by (used in) financingactivities 702 1060Cash folws frominvestingactivities
Capital Expenditures -936 -1139
Capital Expenditures (Fixed Assets) -698 -1036
Capital Expenditures (Other Assets) -238 -103
Net Assets from Acquisitions 0 -209
Sale of Fixed Assets & Businesses 0 0
Purchase/Sale of Investments -2204 -6422
Purchase of Investments -11153 -21850
Sale/Maturity of Investments 8949 15428
Other Uses 0 -10Other Sources 47 0
Net cash used in investingactivities -3093 -7780Miscellaneous Funds 0 0
Net Change in Cash 2812 2394
Free Cash Flow 4503 8085
CASH FLOW STATEMENT
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Table 4.3 Cash Flow Statement
4.4 Debt Management Analysis
Figure 4.4 Debt management ratios
4.4.1 Debt Ratio
Our companys debt ratios are:
Year 1 Debt ratio=Total debtTatal assets=$15411$24107=63.93%
Year 2 Debt ratio=Total debtTatal assets=$24426$37503=65.13%
Figure 4.4.1 Debt ratios of the two years
Because of a debt ratio of greater than 1 indicates that a company has more debt than
assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets
than debt. As we can see from the consequence, our companys debt ratio less than 1,
which means our firm has lower investment risk.
1.4.2 Time-Interest-Earned Ratio
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Debt ManagementRatios that show a firm usedebt financing and its abilityto meet debt repaymentobligations.
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Times Interest Earned or Interest Coverage is a great tool when measuring a
company's ability to meet its debt obligations. This ratio by dividing earnings before
interest and income taxes (EBIT) by the yearly interest charges that must be met.
However, because of our company do not have long-term debt, so we do not have
interest expense at this time, which contribute to the times-interest-earned ratio is not
defined.
4.5 Liquidity Analysis
Figure 4.5 Ratios related to liquidity analysis
The excess of current assets over current liabilities is known as working capital, a
figure that indicates the extent to which current assets can be converted to cash to
meet current obligations. Therefore, a firms net working capital as a measure of its
liquidity position. In general, the larger the working capital, the better able the
business is to pay its debt.
4.5.1 Current Ratio
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Liquidity AnalysisRatios that show therelationship of a firms cashand other assets to itscurrent liabilities
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We calculate the current ratio by dividing current assets by current liabilities, and our
companys current ratios are:
Year 1 Current ratio=Current assetsCurrent liabilities=$20887$9587=2.18
times
Year 2 Current ratio=Current assetsCurrent liabilities=$32865$16489=1.99
times
Figure 4.5.1 Current ratios of the two years
The ratio is mainly used to give an idea of the company's ability to pay back its short-
term liabilities (debt and payables) with its short-term assets (cash, inventory, and
receivables). The higher the current ratio, the more capable the company is of paying
its obligations. A ratio under 1 suggests that the company would be unable to pay off
its obligations if they came due at that point. We can conclude that our company is in
good financial health, because of our current ratios are both higher than 1 in the two
years.
4.5.2 Quick (Acid- Test) Ratio
We calculate the quick ratio by deducting inventories from current assets and then
dividing the remainder by current liabilities.
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Our companys Quick ratios are:
Year 1 Quick ratios=Current assets-InventoriesCurrent liabilities=$20887-
$359$9587=2.14 times
Year 2 Quick ratios=Current assets-InventoriesCurrent liabilities=$32865-
$484$16489=1.96 times
Figure 4.5.2 Quick ratios of the two years
The quick ratio measures how well a company can meet its obligations without
having to liquidate or depend too heavily on its inventory. Inventories are typically the
least liquid of a firms current assets; hence, they are the assets on which losses are
most likely to occur in case of liquidation. The higher the quick ratio is, the better the
position of the company. The quick ratios of our company tell us we could pay all of
our current liabilities if they came due immediately
4.6 Asset Management Analysis
Figure 4.6 Ratios related to asset management
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Asset ManagementA set of ratios whichmeasure how effectively afirm is managing its assets
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4.6.1 Inventory Turnover
Inventory turnover ratio shows how many times a company's inventory is sold and
replaced over a period. The days in the period can then be divided by the inventory
turnover formula to calculate the days it takes to sell the inventory on hand or
"inventory turnover days".
Inventory Turnover Ratio=entoryaverageinv
sales , and our companys Inventory turnover
ratios are:
Year1 ITR1= sales
Average Invent= $22806
$359
=63.53 times
Year2 ITR2= sales
Aver age I nvent= $30855
$484
=63.75 times
ITR2>ITR1, it means our company has good liquidity and the better ability of turning
inventory into cash or accounts receivable in year 2.
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4.6.2 Days Sales Outstanding
This ratio is a measure of the average number of days that a company takes to collect
revenue after a sale has been made. A low DSO number means that it takes a company
fewer days to collect its accounts receivable. A high DSO number shows that a
company is selling its product to customers on credit and taking longer to collect
money.
The formula is DSO=
365
sannualsale
ceivableRe, and our companys DSO ratios are:
Year1 DSO1=
365
22806
4570
365
sannualsale
ceivableRe= =73.14
Year 2 DSO2=
365
30855
5843
365
sannualsale
ceivableRe=
=69.12
The result is DSO1>DSO2, it means our company in year2 has the chance to put the
cash to use again through quickly turning sales into cash.
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4.6.3 Total Assets Turnover
Total Asset Turnover Ratio measures a firm's efficiency at using its assets in
generating sales or revenue - the higher the number the better.
Total Asset Turnover Ratio=
sTotalAsset
Netsales
Year 1 TATR1=
24107
22806
sTotalAsset
Netsales=
=0.95
Year2 TATR2=
37503
30855
sTotalAsset
Netsales=
=0.82
We can see TATR1>TATR2, it means our company in year 2 is generating a sufficient
volume of business for the size of our asset investment.
4.7 Profitability Analysis
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Profitability AnalysisA set of ratios which showthe combined effects of
liquidity, assetmanagement, and debt onoperating results
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Figure 4.7 Ratios related to profitability analysis
4.7.1 Profit Margin on Sales
Net Margin Ratio illustrates what percentage of each sales dollar is retained in
earnings.
Year 1 Net Margin Ratio1=
22806
3337
NetSales
($)NetIncome=
=14.6%
Year 2 Net Margin Ratio2=
30855
5469
NetSales
($)NetIncome=
=17.7%
Net Margin Ratio2>Net Margin Ratio1, it means our company converting sales into
profits after all expenses are subtracted out is better in year 2 than in year 1.
4.7.2 Return on Total Assets
The return on total assets is a ratio that measures a company's earnings before interest
and taxes (EBIT) against its total net assets. The ratio is considered an indicator of
how effectively a company is using its assets to generate earnings before contractual
obligations must be paid.
The formula of this ratio is:
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ROTA=
setsTotalNetAs
TaxespenseInterestExNetIncome
setsTotalNetAs
EBIT ++=
And our firms ratios are:
Year 1 ROTA1=24107
6603337+ =0.166
Year2 ROTA2=37503
10815469+ =0.175
ROTA2>ROTA1, it indicates that our company in year 2 is more effectively to be
using its assets.
4.7.3 Return on Common Equity
The amount of net income returned as a percentage of shareholders equity. Return on
equity measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested.
The formula is ROE=Equitysr'Shareholde
NetIncome
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Year 1 ROE1=Equitysr'Shareholde
NetIncome =13806
3337 =24.2%
Year 2 ROE2=
Equitysr'Shareholde
NetIncome =
6.19978
5469 =27.4%
Because of ROE2>ROE1, it indicates that the shareholders are earning more money in
year 2 on their shares.
5Alternative Identification, Evaluation andSelection (Computer)
5.1 Alternative Products
In order to fulfill our target, we plan to invest new computers. After careful
examination, we find out that to invest and develop a new product with our own brand
is much better and profitable than pure manufacturing or designing for other
company. As we already run a computer manufacturing industry for two years, and we
have excellent and experienced designing, testing, quality assurance engineers, that is
to say we have already built an entire group to develop and function a brand new
product. Besides that, we have hired two new engineers who graduate from top
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universities in United States, and they bring back the latest technology that can be
applied to our designing phase and manufacturing phase.
Figure 5.1 Sales Forecast for PC and Tablet
Before research and design phase, we have study the PC market report these years.
We can see that, with coming of information era, people gain more and more need to
have a own personal especially portable computer to process data at anywhere ant
time. Since the first coming of laptop, the sales amount of laptop keeps increasing for
decades. While in the year 2010, which we call the first year of tablet, it has become
a promising and neglectable product which brings unpredictable profits. And we
decided to invest in tablet and gain more profit and reputable.
In order to increase the market share, we
have studied two kinds of tablet product
as our target. The product 1 is quite
stable, and wed like to design it into a
business tablet. As we all know, with the
fast pace of the economic world, that
businessman have to travel very often to
get bills done or to negotiate with other competitors. So the key function they want is
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flexibility, mobility, portable, stable, security. So thats why we design this tablet. It
looks like a normal laptop, but it is much superior to laptop. It can bend 30 degree and
work as a desktop, which can give better view and convenience when displaying and
processing document. At the same time, it can bend 180 degree and work as tablet.
This tablet provide with great security, that business man can check email and stock
market anytime they want, and without any possibility of leakage of information.
The product two we promote is an
entertainment tablet. As the appearance of
Ipad, that we got to know that, the power of
entertainment and service market is
neglectable, it can bring great profits and
chances. So in this tablet, we emphasis the
entertainment function, that young people can use it as PlayStation, social network
hub, video camera, movie player. It equipped with OLED touch screen, which looks
super modern and fashionable.
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5.2 Marketing Strategy
When conducting market strategy, 4P criteria has to be considered in order to make
wise decisions.
The first P is Product
Product is the baseline for a company, if a company cannot design a product that good
enough, it cannot develop in a sustainable way. Besides the design, quality of the
product is also a very important factor that affects the customers decision. Even
though the service develops adequately, none of the consumer would like to repair the
product very often. Thus the quality of the product is a great insurance of consumer
experience. Moreover, good and mutual interaction with customers has to be
established. Since, if we want to sell product continuously, we should keep a good
relation with consumer, if they get good experience, they will trust our company, our
design and our service. Actually their rating affects the market value and reputation of
the company. The final part of the product is professionalism of the design. Actually
there are so many fake product in the market, if the product is not superior or not
unique, that you will find duplicates in the market very soon. Therefore, all the
product should be very professional and impossible to copy.
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The second P is Pricing
Before the investment and retailing process, the purchasing power has to been
examined. If consider the appreciation rate, the purchasing power has increase several
times these decades. The price between 3000 HKD to 5000 HKD is acceptable, since
it is the same amount as the spare money of a normal people. If people want to buy
the product, it is far from impossible, that he can save some money for 1 month, then,
he will get a high tech product. Another topic that is very hot recently is value-added
feature. Since apple imported the concept value-added service, the iTunes store earn
large amount of money. Therefore, our company has to consider the value-added
feature. The preliminary idea is to set up an online store, where our customer can buy
things use a specific icon, and several discount will be offered. Besides that, as our
product is a high tech product, that people likes to show off if they got such kind of
things. So wed like to design some luxury goods to match the tablet. We believe that,
our product can give great confidence to our customer, to let them feel like as if they
are success men.
The third P is Promotion
Nowadays, prompting a product is even much more important an appealing than the
real product. If the advertisement is innovative and impressive, which leaves an
unforgettable memory on audience mind, the audience my turn into potential
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customer just one second after they watched advertisement. Besides that,
demonstration is also very important. Roadshow is a kind of new word that come into
being recently, that the manufacture tends to display their product on the road, and let
any people to try it. The apple platinum experiment store in Central is a good example
in case. Every customer who steps into the three floor store can touch and play and
use all the product in the store. Then the costumer gained valuable experience and in
person judgment of your product, and they can decide whether to purchase one at the
store. Finally, coupon promotion is a direct way to attract potential customer and let
them to purchase more because the certain requirement of the coupon. Then our
company can gain more profit per head.
The fourth P is Place
Twenty years ago, the only purchasing channel is from shopping mall and
supermarket. Nowadays with the development of internet and software technology,
various ways of purchasing come into being and stand the test from both time and
market. Official store is good way real purchasing, people can buy things in our
official store and register as member, then more discount information and privileges
will be sent to them. B2C website is also a good choice after the successful model of
eBay and Taobao. The young generation tends to buy things from internet, which is
more time saving and money saving method. 3C chain store is a booming and new
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shopping style in China. And we can give delegation to 3C store and use their local
retailing network to sell the product.
6Alternative Identification, Evaluation and Selection (Finance)
6.1 Alternative Selection
As the selling strategy we stated above, we would like to set the price of our two
products as follows:
Product 1:
As the target consumer of this product is businessman. The character of businessman
is they are rich, and always busy, lack of considering the purchasing choice, emphasis
the portability, stable and security. So the electronic component of product one is
high-end, leading to the total price of it are much higher. So the price of it is 4888
HKD.
Product 2:
The target consumer of this product is young people. They are not rich enough, but
they are eager to have new things to show off. As they are young and intelligent, we
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can add more feature and functions to this tablet. The industry design and appearance
has to be attractive and fashionable enough. The price we set for this is 3999 HKD.
Descriptions Product 1 Product 2
LCD Monitor HKD 890.00 HKD 1,011.00
USB I/O Port HKD 15.00 HKD 12.00
IC HKD 702.00 HKD 470.00
PCB HKD 64.00 HKD 36.00
Memory HKD 387.00 HKD 214.00
HDD HKD 520.00 HKD 270.00
Display & Sound HKD 279.00 HKD 310.00
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system
Total Cost HKD
2,857.00
HKD
2,323.00
Price HKD
4,888.00
HKD
3,999.00
Table 6.1.1 Details for Products Price
As the price and our market survey, the sales amount we predict is like below. Our
market is limited to Hong Kong local market, which is relatively small compare to
international market and mainland market. At the beginning, both product 1 and 2
gain good reputation, and the sales amount will reach a peak in the year 3. After year
3, the sales amount of product 2 will keep increasing, as the completeness of the
function and more improvement. The sales mount of product 1 will start to decrease at
year 4 and 5. In the year 5, product 2 will be the powerful candidate in the market and
take over the market share of product 1.
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Year 1 Year 2 Year 3 Year 4 Year 5
Product 1 8400 10220 10780 10080 9660
Product 2 9940 10360 10640 11060 11340
Table 6.1.2 Sales Forecast for Products
Figure 6.1 Sales Forecast for Products
Apart from products price and sales forecast, we also made a calculation about project
initial capital.
Investment Product 1 Product 2
Devices and other HKD 7,000,000.00 HKD 4,000,000.00
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Salvage Value (in year 5) HKD 500,000.00 HKD 500,000.00
R&D HKD 1,800,000.00 HKD 1,800,000.00
Office HKD 9,500,000.00 HKD 9,500,000.00
Others HKD 500,000.00 HKD 400,000.00
Total HKD 19,300,000.00 HKD 16,200,000.00
Table 6.1.3 Initial Capital for New Products
In consideration of inflation influence, we predict the labor cost will increase based on
10% inflation.
Per unit Year 1 Year 2 Year 3 Year 4 Year 5
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Labor
Cost
HKD
300.00
HKD
330.00
HKD
363.00
HKD
399.30
HKD
439.23
Table 6.1.4 Labor Cost
We set the MARR for the new product is 20% as well as 16.50% tax-rate and 15%
long-term interest. Then, we prepare the income and cash flow statements for both
alternative products.
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Product 1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
R evenue H KD 41,059,200.00 HK D 49,955,360.00 H KD 52,692,640.00 HK D 49,271,040.00 HK D 47,218,080.00
Expense
Materials (HKD 23,998,800.00) (HKD 29,198,540.00) (HKD 30,798,460.00) (HKD 28,798,560.00) (HKD 27,598,620.00
Labour (HKD 2,520,000.00) (HKD 3,372,600.00) (HKD 3,913,140.00) (HKD 4,024,944.00) (HKD 4,242,961.80
Overhead (HKD 220,000.00) (HKD 240,000.00) (HKD 280,000.00) (HKD 230,000.00) (HKD 220,000.00
Depreciation (HKD 2,895,000.00) (HKD 2,460,750.00) (HKD 2,091,637.50) (HKD 1,777,891.88) (HKD 1,511,208.09
R&D (HKD 1,800,000.00) (HKD 800,000.00) (HKD 420,000.00) (HKD 150,000.00) HKD 0.00
SG&A (HKD 2,600,000.00) (HKD 2,700,000.00) (HKD 2,700,000.00) (HKD 2,300,000.00) (HKD 2,300,000.00
Taxable Income HKD 11,425,400.00 HKD 14,683,470.00 HKD 15,609,402.50 HKD 14,439,644.13 HKD 13,645,290.11
ncome Taxes (16.5%) (HKD 1,885,191.00) (HKD 2,422,772.55) (HKD 2,575,551.41) (HKD 2,382,541.28) (HKD 2,251,472.87
Net Income HKD 9,540,209.00 HKD 12,260,697.45 HKD 13,033,851.09 HKD 12,057,102.84 HKD 11,393,817.24
Product 2 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
R evenue H KD 39,750,060.00 HK D 41,429,640.00 H KD 42,549,360.00 HK D 44,228,940.00 HK D 45,348,660.00
Expense
Materials (HKD 23,090,620.00) (HKD 24,066,280.00) (HKD 24,716,720.00) (HKD 25,692,380.00) (HKD 26,342,820.00
Labour (HKD 2,982,000.00) (HKD 3,418,800.00) (HKD 3,862,320.00) (HKD 4,416,258.00) (HKD 4,980,868.20
Overhead HKD 190,000.00 HKD 240,000.00 HKD 270,000.00 HKD 280,000.00 HKD 310,000.00
Depreciation (HKD 2,430,000.00) (HKD 2,065,500.00) (HKD 1,755,675.00) (HKD 1,492,323.75) (HKD 1,268,475.19
R&D (HKD 1,800,000.00) (HKD 700,000.00) (HKD 340,000.00) (HKD 110,000.00) HKD 0.00
SG&A (HKD 2,600,000.00) (HKD 2,700,000.00) (HKD 2,650,000.00) (HKD 2,400,000.00) (HKD 2,400,000.00
Taxable Income HKD 11,437,440.00 HKD 12,119,060.00 HKD 12,484,645.00 HKD 12,907,978.25 HKD 13,066,496.61
Income Taxes (16.5%) (HKD 1,887,177.60) (HKD 1,999,644.90) (HKD 2,059,966.43) (HKD 2,129,816.41) (HKD 2,155,971.94
Net Income HKD 9,550,262.40 HKD 10,119,415.10 HKD 10,424,678.58 HKD 10,778,161.84 HKD 10,910,524.67
Income Statement
Table 6.1.5 Income Statements for New Products
Product 1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Operating
Activities
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Net Income HKD
9,540,209.00
HKD
12,260,697.45
HKD
13,033,851.09
HKD
12,057,102.84
HKD
11,393,817.24
Depreciation (HKD
2,895,000.00)
(HKD
2,460,750.00)
(HKD
2,091,637.50)
(HKD
1,777,891.88)
(HKD
1,511,208.09)
Investment
Activities
Investment (HKD
19,300,000.00)
Salvage Value HKD
500,000.00
Net Cash Flow (HKD
19,300,000.00)
HKD
6,645,209.00
HKD
9,799,947.45
HKD
10,942,213.59
HKD
10,279,210.97
HKD
10,382,609.14
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Product 2 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Operating
Activities
Net Income HKD
9,550,262.40
HKD
10,119,415.10
HKD
10,424,678.58
HKD
10,778,161.84
HKD
10,910,524.67
Depreciation (HKD
2,430,000.00)
(HKD
2,065,500.00)
(HKD
1,755,675.00)
(HKD
1,492,323.75)
(HKD
1,268,475.19)
Investment
Activities
Investment (HKD
16,200,000.00)
Salvage Value HKD
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500,000.00
Net Cash Flow (HKD
16,200,000.00)
HKD
7,120,262.40
HKD
8,053,915.10
HKD
8,669,003.58
HKD
9,285,838.09
HKD
10,142,049.48
Table 6.1.6 Cash Flow Statement for New Products
According to financial statements listed above, we calculate the Net Present Wealth
(NPW), Discounted Payback Period (DPP), and Internal Rate of Return (IRR) for
both alternatives.
Criterion Product 1 Product 2
NPW HKD 12,122,457.82 HKD 12,133,059.11
DPP 2.8 years 2.2 years
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IRR 37% 42%
Table 6.1.7 Evaluation Criterion
Through Table 6.1.7, it is obvious that the two alternatives have close NPW in year 5.
However, relating to DPP and IRR, the Product 2 has a better performance. Hence,
our chosen product for the next 5 years is Product 2.
6.2 Bank loan offer and Selection
We approach three different Banks to analyze their loan offer plan. Our loan amount
is 16,200,000.00HKD.The three Bank Ltd are the leading private sector commercial
banks in Hong Kong. The banks can be described as bank with a steady past,
prospering present and promising future.
Advantages:
Interest rates:
Banks that offer loans do so at competitive rates of interest and on mutually
understood and accepted repayment terms, as compared to unconventional lenders.
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Easy availability:
Considering that lending institutions like banks must always keep their depositors
money working for them and earning more money and interest than it pays out to
depositors, bank loans should, in theory, always be available to anyone seeking one.
Good lending terms and relations with the bank:
If a borrower meets the banks lending criteria to the letter, he could benefit with a
lower rate of interest and relaxed and easy repayment terms. Add to this the bonus of
having a good working relationship with the bank.
Speed:
If the borrower has all the appropriate documentation, any bank can process his
application within an hour.
Uses:
A borrower can use a bank loan for a number of reasonseither for setting up a
business, or to buy home improvement goods or to go on a holiday. In fact, a bank
loan is a financial package which helps you tide over a difficult time or set up
business or invest in stocks. Considering it is a loan, it means that eventually you will
have to pay the bank back within a stipulated time at a predetermined rate of interest.
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No need for collateral:
For a personal loan, a borrower neednt produce any security or collateral. Besides,
even the documentation is very little, as compared to other kinds of loans, thereby
expediting the processing time.
No need to specify use of the money:
In case of a personal loan, one need not spell out what the money is going towards.
All a borrower should do is to repay the money in equated monthly installments on or
before the stipulated date.
Disadvantages:
Borrowers over-borrow:
People sometimes over borrow money and get caught in their own debt. Often, this
can lead to a shortfall in cash flow and payments can take precedence over income. To
prevent this, loan repayments are restricted to a set percentage of a borrowers
income.
Prepayment penalty:
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Often, loans come with a prepayment penalty which prevents the borrower from
paying the loan earlier than the stipulated date without incurring any extra costs.
Restrictions:
Banks levy a number of restrictions on the transaction. This includes having a good
credit history before applying for a loan, and there are often restrictions about how the
money should be used.
Bank A offer:
Bank B offer:
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Bank C offer:
As the total amount we loan is 16,200,000.00HKD, and we have to compare the loan
program provide by these three local banks, as the amount is important and significant
to a small company. The loan from Bank A is not profitable, as the interest rate is the
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highest. Even though only 1 percent of extra amount is added to the interest rate, it
means a lot to the loan amount as high as millions dollar. So we didnt consider their
loan program. The loan from Bank B is acceptable, the payment period is short, but
we have to pay more interest. While the Bank C has longer payment period, and the
interest we have to pay is less. Therefore the final choice is Bank C.
4 Risk Management
7.1 Break Even Analysis
Break even analysis finds the point where the total revenue is just sufficient to cover
the total cost. The break-even point is one of the simplest yet least used analytical
tools in management. It helps to provide a dynamic view of the relationships between
sales, costs and profits. According to the after-tax net revenue, net salvage value, tax
savings from depreciation, PW of capital expenditure and after-tax expenses. We can
find the break even point of the analysis.
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Cash inflow:
Net salvage 500000
Revenue:
X(1-0.165)($3999) 3339.165X 3339.165X 3339.165X 3339.165X 3339.165
X
Depreciation
credit
0.15(depreciation) 2430000 2065500 1755675 1492324 190271
Cash outflow:
Investment -16200000
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Variable cost:
-X(1-0.165)($2800) -2338X -2338X -2338X -2338X -2338X
Fixed cost:
-(1-0.165)($1600000) -1336000 -1336000 -1336000 -1336000 -1336000
Net cash flow -16200000 1001.165X
+1094000
1001.165X+
729500
1001.165X+
419675
1001.165X
+156324
1001.165
X-
1145729
Table 7.1 Break Even Analysis
We calculate the PWs of cash inflows and outflows as follows.
PW of cash inflows:
PW(15%)Inflow=(PW of after-tax net revenue)+(PW of net salvage value)+(PW of
tax savings from depreciation)
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=3339.165X*(P/A,15%,5)+500000(P/F,15%,5)+2430000(P/F,15%,1)+2065500
(P/F,15%,2)+1755675 (P/F,15%,3)+1492324 (P/F,15%,4)+190271(P/F,15%,5)
=11193.548913X+248600+2113128+1561724.55+1154356.3125+8532584.8632+946
02.7412
=13704996.467+11193.548913X
PW of cash outflows:
PW(15%)Outflow=(PW of capital expenditure)+(PW of after-tax expenses)
=16200000+(2338X+1336000)*(P/A,15%,5)
=16200000+7837.4436X+4478539.2
=7837.4436X+20678539.2
The NPW of cash flows for the BMC is thus
PW(15%)=13704996.467+11193.548913X-(7837.4436X+20678539.2)
=3356.105313X-6973542.733
PW(15%)=3356.105313X-6973542.733=0
X=2077.8676717884032078
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Through the calculation, we find the demand is about 2077. It means when the sales
quantity reach the demand of 2077, the company could get 15% ROR. Then we can
forecast the sales quantity based on the break even point.
7.2 Sensitivity Analysis
Sensitivity analysis can glean a sense of the possible outcomes of an investment. For
our new product, we select unit price, unit cost, demand, and salvage value as
variables to make a sensitivity analysis to determine the effect on the NPW and IRR.
Sensitivity Analysis
Variables -20% -10% 0% 10% 20%
Unit price IRR -18% 16% 42% 65% 87%
NPW (HKD
11,531,385.83)
HKD
300,836.64
HKD
12,133,059.11
HKD
23,965,281.58
HKD
35,797,504.04
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Unit Cost IRR 68% 55% 42% 27% 11%
NPW HKD
25,879,622.15
HKD
19,006,340.63
HKD
12,133,059.11
HKD
5,259,777.59
(HKD
1,613,503.93)
Demand IRR 25% 33% 42% 50% 57%
NPW HKD
4,339,261.43
HKD
8,236,160.27
HKD
12,133,059.11
HKD
16,029,957.95
HKD
19,926,856.79
Salvage
value
IRR 42% 42% 42% 41% 41%
NPW HKD
12,254,851.39
HKD
12,193,955.25
HKD
12,133,059.11
HKD
12,072,162.97
HKD
12,011,266.83
Table 7.2 Sensitivity Analysis
Figure 7.2.1 Sensitivity Graph of IRR
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Figure 7.2.2 Sensitivity Graph of NPW
Through the sensitivity graphs, for both NPW and IRR we find there is a direct ratio
relationship with unit price and demand. On the contrary, as the unit cost increasing,
the features will have a dramatic decline. In addition, it is salvage value that almost
make no difference on the NPW and IRR.
7.3 Scenario Analysis
Three plausible scenarios assume a set of values for key input variables. We assume
some fluctuation of the demand and price. Then calculate the NPW of cash flows..
The worst case: demand drop 45%, price 25% discount
X=4400
PW(15%)Inflow=(PW of after-tax net revenue)+(PW of net salvage value)+(PW of
tax savings from depreciation)
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=2504.165X*(P/A,15%,5)+450000(P/F,15%,5)+2430000(P/F,15%,1)+2065500
(P/F,15%,2)+1755675(P/F,15%,3)+1492324(P/F,15%,4)+190271(P/F,15%,5)
=2504.165X*3.3522+450000*0.4972+2113128+1561724.55+1154356.3125+853258
4.8632+94602.7412
=36935632.4172+223740+2113128+1561724.55+1154356.3125+8532584.8632+946
02.7412
=50615768.884
PW(15%)Outflow=(PW of capital expenditure)+(PW of after-tax expenses)
=16200000+(2839X+1586500)*(P/A,15%,5)
=2839X*3.3522+1586500*3.3522+16200000
=12491600+21518265.3
=34009865.3
The NPW of cash flows for the BMC is thus
PW(15%)=50615768.884-34009865.3=16605903.584
Most-likely case:
X=8000
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The NPW of cash flows is thus
PW(15%)=13704996.467+11193.548913X-(7837.4436X+20678539.2)
=3356.105313X-6973542.733
PW(15%)=19875299.771
The best case: demand increase 30%, price increase 20%
X=10400
PW(15%)Inflow=(PW of after-tax net revenue)+(PW of net salvage value)+(PW of
tax savings from depreciation)
=4007.165X*(P/A,15%,5)+550000(P/F,15%,5)+2430000(P/F,15%,1)+2065500
(P/F,15%,2)+1755675(P/F,15%,3)+1492324(P/F,15%,4)+190271(P/F,15%,5)
=4007.165*10400*3.3522+550000*0.4972+2113128+1561724.55+1154356.3125+85
32584.8632+94602.7412
=153431169
PW(15%)Outflow=(PW of capital expenditure)+(PW of after-tax expenses)
=16200000+(2004X+1169000)*(P/A,15%,5)
=16200000+(2004*10400+1169000)*3.3522
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=89983933.32
The NPW of cash flows is thus
PW(15%)=153431169-89983933.32=63447235.68
Variable
Considered
Worst Case Most Likely Case Best Case
Unit demand 4400 8000 10400
Unit price HKD2,999 HKD3,999 HKD4,799
Variable cost HKD3,400 HKD2,800 HKD2,400
Fixed Cost HKD1,900,000 HKD1,600,000 HKD1,400,000
Salvage value HKD450,000 HKD500,000 HKD550,000
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PW(15%) HKD16,605,904 HKD19,875,300 HKD63,447,236
Table 7.3 Scenario Analysis
Through scenario analysis, it displays a marked difference for three types of
scenarios. When the demand has a 45% drop and 25% discount of price. The
PW(15%) is about 16,605,904 HKD. Nevertheless, when the demand increase 30%,
and price increase 20%.There is a big profit. The result is 63,447,236 HKD.
In a word, if a company pursues maximize profit, we should do our best to increase
sales and price as well as reduce the fixed cost and variable cost.
7.4 Recommendation
As the company aim to promote a new product, it is important to have a strategic
approach to managing supply chain risks and consider the varied and unexpected
forms of disruptive events and losses by taking a holistic view of loss sources
combined with emerging issues and business considerations for the industry.
Meanwhile, because the company only has a 2-year business, lack of capital is
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another facing difficulty. We should speed up the cash flow to maintain adequate
committed credit lines and cash balances to ensure sufficient and flexible funding is
available to the company.
5 Conclusion
As the report mentioned above, our business operates in good condition with a
positive financial structure. Through the promotion of our new product, we believe
that we can capture much more market share as well as organizational reputation.
Finally, it is feasible that we will come into the GEM and become one of the listed
company in Hong Kong after 5 years.