Description

Financial Modeling
June 2024 Examination
1. A project proposal has been received by RKD Ltd. To capture a new market segment
which is expected to generate substantial revenue for the firm. The project requires
machinery to be imported from France and the cost of machinery is $4.8 million. Based
on the assessment of the marketing team of RKD Ltd., it is predicted that additional
revenue generated from the project will be around $2.5 Million per year for the next
five years and after that, the market will cease to exist. To have a conservative
assessment, the proposal suggests using the SLN method of depreciation for the
machinery over its five-year economic life to depreciate the asset to Zero Value. The
cost of goods sold, and other operating expenses related to the project are predicted to
be 25 % of sales. Additionally, the project would require a net working capital of
$350,000 immediately which can be utilized in any other project after the current
project ends. The machinery may be salvaged post-closure of the project for $500,000.
Assuming the corporate tax @ 30% and the required rate of return/hurdle rate for
RKD Ltd to take up the project as 20%, take a call if RKD can proceed with the
project? Provide a holistic view of the project and rationale for accepting or rejecting
the project proposal based on NPV, IRR, PBP, DPBP, and PI criteria. Make and state
any necessary assumptions if required. Create a dynamic model using to evaluate the
above problem. The model should use cell referencing to ensure changing of
assumptions/input items and therefore automatically reflecting changes in the final
decision. (10 Marks)
Ans 1.
Introduction
RKD Ltd. faces a pivotal decision regarding a proposed project to enter a new market
segment expected to yield significant revenues over a limited five-year period. The project
involves the acquisition of machinery from France for $4.8 million, with anticipated
additional annual revenues of $2.5 million. However, this machinery’s value will depreciate
to zero using the straight-line method over its economic life. Furthermore, the project incurs
25% sales-related operational costs and requires an initial investment in net working capital
of $350,000, which is recoverable at the project’s end. A potential salvage value of $500,000
for the machinery post-project adds to the financial considerations. This introduction sets the
stage for a detailed financial analysis using various evaluation metrics such as Net Present
Value (NPV), Internal Rate of Return (IRR), Payback Period (PBP), Discounted Payback
Period (DPBP), and Profitability Index (PI), to determine whether RKD Ltd. should proceed
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2. Using information presented below. Create a dynamic model to compute and
compare (provide inferences and interpretation) the various depreciation approaches
and present the final depreciation schedule on a Graph. The graph needs to be linked
with the Input Details and, therefore, dynamic. (10 Marks)
User Input:
Purchase price of Asset $240,000
Salvage value of Asset $4,000
Useful life of Asset 10 years
Years Start year of Use of Asset 2024
The different depreciation approaches to be considered for the model:
1. Straight-Line
2. Fixed Declining
3. Double Declining
4. Sum-Of-The-Years-Digits
5. Variable Declining Balance
Ans 2.
Introduction
Depreciation is a crucial financial concept used to allocate the cost of tangible assets over
their useful lives. It represents the wear and tear on an asset, the reduction in value due to
usage and technological advancements. Businesses use various depreciation methods to
match the expense recognition with the revenue generated by the asset, which helps in
achieving a fair representation of financial statements. This analysis explores five common
depreciation methods: Straight-Line, Fixed Declining Balance, Double Declining Balance,
Sum-Of-The-Years-Digits, and Variable Declining Balance. Each method offers a unique
approach to expense distribution over an asset’s operational lifespan. By comparing these
methods using a dynamic model, we can understand their impacts on financial statements and
decision-making processes in business, offering insights into their suitability under different
3.a. Create a Dynamic Loan Amortization Schedule by taking three user inputs.
Loan Amount: 50,00,000
Interest Rate: 9% per annum
Loan Tenure: 20 Years
The dynamic loan amortization schedule should provide a tabular response indicating
Monthly EMI, Interest Component, Principal Component, Loan Outstanding after each
EMI repayment. (5 Marks)
Ans 3a.
Introduction
A loan amortization schedule is a detailed table of periodic loan payments, showing the
allocation of each payment into principal and interest. Creating a dynamic amortization
schedule for a specified loan amount, interest rate, and tenure can aid borrowers in
understanding how their loan balance decreases over time. This setup helps in financial
planning and assessing the cost of borrowing.
Concept and Application
The concept of a loan amortization schedule revolves around the calculation of periodic
3b.Link the Dynamic Loan Amortization Schedule to create a Graphical Representation
of Payment Breakup (Principal Paid & Interest Paid) as shown below. Also Present a
Stacked Bar Chart representing Principal and Interest paid. (5 Marks)
Ans 3b.
Introduction
Visualizing financial data can significantly enhance understanding and decision-making. A
graphical representation of a loan amortization schedule, particularly through a stacked bar
chart, offers a clear and immediate understanding of how each payment is divided between
principal and interest over the loan’s duration. This visualization aids borrowers in grasping
the financial dynamics of their loan repayment process, helping them manage their finances