Hassan Shabbir Written Assignment 410080

Management

Tasmanian School of Business & Economics

Assignment Cover Sheet

OFFICE USE ONLY

Student ID: 410080 Assignment received:

Family Name: Shabbir

Given Names Hassan

Tutorial: Thursday (day)1pm (time)

Tutor: Paul Tarranto

BEA 
BFA

BMA
 208
Unit Code: BAA Unit Title: Financial Management
BLD 


Assignment Title: Written Assignment Word Count: 984....................................

Hassan Shabbir Written Assignment 410080
Management

Campus:  Sandy Bay  Newnham  Cradle Coast Flexible

I declare that all material in this assignment is my own work except where there is clear
acknowledgement or reference to the work of others. I am aware that my assignment may be submitted to
plagiarism detection software, and might be retained on its database. I have read and complied with the
University statement on Plagiarism and Academic Integrity on the University website at
www.utas.edu.au/plagiarism. I will keep a copy of this assignment until the end of the semester.*

Signed………………………………………Hassan Shabbir………. Dated

10/10/2019……………………………………………
*By submitting this assignment and cover sheet electronically, in whatever form, you are deemed to have made the declaration set out
above.

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Hassan Shabbir Written Assignment 410080
Management

1. Discuss which costs are relevant for the evaluation of this project and which costs are not.
Your discussion should be justified by a valid argument and supported by references to
appropriate sources:

Relevant cost refers to the incremental and avoidable cost of implementing a business decision.
(Accounting-simplified.com 2019). They are used by management to evaluate projects, and to
determine the project cash flows, which are used to decide if the project should be undertaken or
not (Investopedia 2019). The relevant costs related to this project are listed in the table provided
below.

Relevant Costs Irrelevant Costs

Costs(Annual) Cost of Maintenance
Depreciation Administration Costs
Fixed Costs
Opportunity Costs
Variable Costs
Marketing Costs
Cannibalization Costs
Costs(Initial Investment)
Costs to do renovations
Costs of Vehicle Purchasing
Stolen Vehicle Recovery Costs

Relevant costs attempt to determine the objective costs of a business decision. They also objectively
determine the extent of cash outflows that shall result from the implementation of the project.
Relevant costs focus on just that and ignore other costs which do not affect the future cash flows
(Accounting-simplified.com 2019).

Purchasing of 100 cars at avg. price of $17,500 = $1,750,000

Stolen Vehicle Recovery System $1,700 per car = $170,000

Redevelopment and Renovation costs = $220,000

Injection of Net Working Capital = $170,000

Hassan Shabbir Written Assignment 410080
Management

2. How are possible cannibalization and opportunity costs considered in this analysis:

Market Cannibalization:

Market cannibalisation occurs when a company introduces a new product without the intentions of
replacing previous products and it results in the displacement of one of the company’s other
products. It is a sales loss caused by a company's introduction of a new product that displaces one of
its own older products rather than increasing the company's overall market share (Investopedia
2019). In other words, rather than appealing to an additional segment of the market, the new
product line appeals to the company's current market, and reduces the demand for its already
established products. In terms of this scenario, market cannibalization means that a company's own
two product lines compete against one another (Investinganswers.com 2019).

In the case of the project for Mystic Journey Ltd. their cannibalisation costs would be the loss of
$20,000 that they would suffer from their discount rental car business should this project go ahead.

Opportunity Costs:

An opportunity cost is the cost of passing up the next best choice when making a decision
(InvestorWords.com 2019). They come into play when a decision that involves a trade-off between
two or more options has to be made (Referenceforbusiness.com 2019).

For Mystic Journey Ltd. the opportunity cost incurred would be the $90,000 they would receive if
they leased the lots to an auto repair company.

3. Depreciation:

The Depreciation expenses for the four years are listed in the table below.

564,200 Year 1
382,300 Year 2
259,000 Year 3
175,500 Year 4

The reason the Diminishing balance( Referred to as the Written Down method in the income tax act
section 32) was used to calculate depreciation is because it is a good method for assets that quickly
lose their value or become obsolete, like cars and other technology that has more utility in the
earlier years of their life.
Hassan Shabbir Written Assignment 410080
Management

4. Cash Flows associated with the project:

Year Cash Flow

1 290,000
2 446,000
3 582,260
4 586,190
5 741,700

The cash flows for the years are calculated by subtracting the costs from the total revenues. Tax
was calculated using the 30% rate given in the appendix. Depreciation is added back to the after-
tax cash flow due to it not being a cash flow. Opportunity costs are calculated after depreciation
calculations and any of the working capital is added to the cash flows. All calculations can be
found in Appendix 2.

5. Payback Period:

The calculation of the payback period is done by dividing the initial investment value and annual
net cash flow of the project which means it does not take into consideration the time value of
money, so the number below may not be an accurate depiction of the time it will take to pay the
investment back. This method only considers the average cash flow rather than each of the
individual one as they occur. It will take just over four years to repay the initial investment. The
calculations for the payback period (annual net cash flow, payback period) can be found in
Appendix 3.

Cash Flows:
Initial Investment = $2,340,000(refer to appendix 1 for calculations)
Annual net cash flow =$529,230
Payback period= 4.42 years which is not ideal for Mystic Journey Ltd. it’s going to take most of
the complete length of the project (5 years) to get the pay back on the initial investment.

6. NPV of the project:

Number of periods = 5
CF0 = -$2,340,000
CF1 = $290,000
Hassan Shabbir Written Assignment 410080
Management

CF2 = $446,000
CF3 = $582,260
CF4 = $586,190
CF5= $741,700
R = 12%
The NPV is -$517,686.95. The calculations for the Npv can be found in Appendix 4. The NPV is
negative which means that the project should not be accepted to go ahead.

7. Sensitivity Analysis:
Sensitivity analysis examines the effect of changing an independent variable on a dependent
variable (Investopedia 2018). Sensitivity analysis Npv calculations based on new scenarios
Part a) projected sales drop by 11%
Calculations in Appendix 5
Npv= $-820,656.63
Part b) Marketing campaign boosted by 100% and Projected Sales go up 2%
Calculations in Appendix 6
NPV= $-1,438,987.26
Part c) Operating Costs go up 20%
Calculation in Appendix 7
NPV= $-1,460,590.77
8. Recommendation:
The NPV is negative in all scenarios calculated, which means that the project doesn’t meet the
base level acceptance of a project and shouldn’t be undertaken. Also the payback period of a
little over four years for a five year project means that it will take most of the duration of the
project to pay back the initial investment. Taking all this into account Mystic Journey Ltd. Should
not go ahead with this project.
Hassan Shabbir Written Assignment 410080
Management

Appendixes

Appendix 1

Assumption: Residual value after 5 years is $2500

The method that is used to calculate the depreciation rate for the diminishing balance method is

r
1−
√
n

where n is the number of years, r is the residual value and c is the initial cost of the cars.

Calculations:

2500
1−
√
5

17500

= 0.3224 which is 32.24%

Year Cost Depreciation Accumulated Carrying Depreciation

Ended 30 June expense (depn depreciation amount expense
expense per total
vehicle)
32.24% * (cost –
accum
depreciation)
2021 17,500 5,642 5,642 11,858 564,200
2022 3,823 9,465 8,035 382,300
2023 2,590 12,055 5,445 259,000
2024 1,755 13,810 3,690 175,500

Appendix 2:

Year Variable Fixed Administrative Depreciation Marketing Cannibalization Total

Costs Costs Costs Costs Costs Coats
1 80,000 180,000 110,000 0 30,000 20,000 420,000
2 110,000 180,000 110,000 564,200 30,000 20,000 1,014,200
3 115,000 180,000 110,000 382,300 30,000 20,000 837,300
4 120,000 180,000 110,000 259,000 0 20,000 689,000
5 125,000 180,000 110,000 175,500 0 20,000 610,500
Hassan Shabbir Written Assignment 410080
Management

Year 1 2 3 4 5
Revenue $800,000 $1,100,000 $1,150,000 $1,200,000 $1,250,000
Expenses 420,000 1,014,200 837,300 689,000 610,500
Earnings(befor 380,000 85,800 312,700 511,000 639,500
e tax)
Tax (30%) 114,000 25,740 93,810 153,300 191,859
Previous year’s 0 114,000 25,740 93,810 153,300
Tax
After Tax Cash 380,000 (28,200) 289,960 417,190 486,200
flows
Plus 0 564,200 382,300 259,000 175,500
Depreciation
Opportunity -90,000 -90,000 -90,000 -90,000 -90,000
Costs
Working 0 0 0 0 170,000
Capital
Total 290,000 446,000 582,260 586,190 741,700

Appendix 3:

Initial Investment = ($17,500 x 100) + ($1,700 x 100) + $215,000 + $30,000(90,000/3) + $170,000

= $1,750,000 + $170,000 + $220,000 + $30,000 + $170,000

= $2,340,000

Annual Net Cash flow= Sum of Cash flows / number of years

290,000+446,000+582,560+586,190+741,700/5

=529,230

Payback period= Initial Investment/Annual net cash flow

2,340,000/529,230=4.42 Years
Hassan Shabbir Written Assignment 410080
Management

Appendix 4:

NPV formula

CF 1 CF 2 CFn
1
+ 2
+…+ −CF 0
( 1+ r ) ( 1+ r ) ( 1+r )n

Number of periods = 5
CF0 = -$2,340,000
CF1 = $290,000
CF2 = $446,000
CF3 = $582,260
CF4 = $586,190
CF5= $741,700
R = 12%
290,000 446,000 582,260 586,190 741,700
+ + + + −2,340,000
( 1.12 )1 ( 1.12 )2 ( 1.12 )3 ( 1.12 )4 ( 1.12 )5

=-517,686.95

Appendix 5:

Year Variable Fixed Administrative Depreciation Marketing Cannibalization Total

Costs Costs Costs Costs Costs Costs
1 71,200 180,000 110,000 0 30,000 20,000 411,200
2 97,900 180,000 110,000 564,200 30,000 20,000 1,002,100
3 102,350 180,000 110,000 382,300 30,000 20,000 824,650
4 106,800 180,000 110,000 259,000 0 20,000 675,800
5 112,500 180,000 110,000 175,500 0 20,000 598,000

Year 1 2 3 4 5
Revenue $712,000 $979,000 $1,023,500 $1,068,000 $1,112,500
Expenses 411,200 1,002,100 824,650 675,800 598,000
Earnings(befor 300,800 -23,100 198,850 392,200 514,500
e tax)
Tax (30%) 90,240 -6,930 59,655 117,660 154,350
Previous year’s 0 90,240 -6,930 59,655 117,600
Tax
After Tax Cash 300,800 (113,340) 205780 332,545 396,900
Hassan Shabbir Written Assignment 410080
Management

flows
Plus 0 564,200 382,300 259,000 175,500
Depreciation
Opportunity -90,000 -90,000 -90,000 -90,000 -90,000
Costs
Working 0 0 0 0 170,000
Capital
Total 210,800 360,860 498,080 501,545 652,400

210,8 00 360,860 498,080 501,545 652,40 0

+ + + + −2,340,000
( 1.12 )1 ( 1.12 )2 ( 1.12 )3 ( 1.12 )4 ( 1.12 )5

Npv= -820,656.63

Appendix 6

Values calculated in excel

Yea Variab Fixed Administrati Depreciati Marketi Cannibalizati Total

r le Costs ve Costs on ng Costs on Costs Coats
Costs
1 81,600 180,00 110,000 0 60,000 20,000 451,600
0
2 112,20 180,00 110,000 564,200 60,000 20,000 1,046,4
0 0 00
3 117,30 180,00 110,000 382,300 60,000 20,000 869,600
0 0
4 122,40 180,00 110,000 259,000 0 20,000 691,400
0 0
5 127,50 180,00 110,000 175,500 0 20,000 613,000
0 0

Year 1 Year 2 Year 3 Year 4 Year 5

816,000 1,122,000 1,173,000 1,224,000 1,275,000
451,600 1,046,400 869,600 691,400 613,000
364,400 75,600 303,400 532,600 662,000
109320 22680 91020 159780 198600
109320 22680 91020 159780
109320 -86640 68340 68760 38820
477,560 450,640 327,760 214,320
-90,000 -90,000 -90,000 -90,000 -90,000
170,000
Hassan Shabbir Written Assignment 410080
Management

19320 387,560 360,640 237,760 294,320

19,320 3 87,5 60 360,64 0 237,760 294,32 0

+ + + + −2,340,000
( 1.12 )1 (1.12 )2 ( 1.12 )3 ( 1.12 )4 (1.12 )5

NPV= $-1,438,987.26

Appendix 7

Yea Variab Fixed Administrati Depreciati Marketi Cannibalizati Total

r le Costs ve Costs on ng Costs on Costs Coats
Costs
1 96,000 216,00 110,000 0 60,000 20,000 502,000
0

2 132,00 216,00 110,000 564,200 60,000 20,000 1,102,2

0 0 00
3 138,00 216,00 110,000 382,300 60,000 20,000 926,300
0 0
4 144,00 216,00 110,000 259,000 0 20,000 749,000
0 0
5 150,00 216,00 110,000 175,500 0 20,000 671,500
0 0

Year 1 Year 2 Year 3 Year 4 Year 5

800,000 1,100,000 1,150,000 1,200,000 1,250,000

502,000 1,102,200 926,300 749,000 671,500
298,000 -2,200 223,700 451,000 578,500
89400 -660 67110 135300 173550
89400 -660 67110 135300
89400 -90060 67770 68190 38250
474,140 450,070 327,190 213,750
-90,000 -90,000 -90,000 -90,000 -90,000
170,000
-600 384,140 360,070 237,190 293,750

−600 384,140 360,070 237,190 293,750

+ + + + −2,340,000
( 1.12 )1 ( 1.12 )2 ( 1.12 )3 ( 1.12 )4 ( 1.12 )5
Hassan Shabbir Written Assignment 410080
Management

NPV= $-1,460,590.77

References

Investinganswers.com (2019), ‘Market Cannibalization Definition & Example’.

<https://investinganswers.com/dictionary/m/market-cannibalization>
(Accessed 2 Oct2019)

Investopedia 2018, ‘initial cash flow’

<https://www.investopedia.com/terms/i/initialcashflow.asp>
(Accessed 23rd April 2019)

Investopedia 2019, ‘market cannibalisation’

<https://www.investopedia.com/terms/m/marketcannibilization.asp>
(Accessed 19th April 2019)

Investopedia 2018, ‘sensitivity analysis’.

<https://www.investopedia.com/terms/s/sensitivityanalysis.asp>
(Accessed 29th April 2019)

Investopedia, 2019, ‘relevant cost’.

<https://www.investopedia.com/terms/r/relevantcost.asp>
(Accessed 20th April 2019)