7BSP1245 Finance: HMS Plc Plant Investment Feasibility Study Report

This report analyzes the financial feasibility of Hatfield Manufacturing Systems Plc's (HMS Plc) proposed plant investment in Turkey, focusing on the manufacture of components for the aerospace and motor vehicle industries. The analysis utilizes capital budgeting techniques, primarily Net Pr...Read More

Analysis of Project
Feasibility

Contents
Overview of Company...................................................................................................................2
Analysis..............................................................................................................................................2
When the financing of the project is done on the basis of debt in UK.....................3
When the financing of the project is done on the basis of equity.............................4
When the financing of the project is done on the basis of equity and debt both 5
Adoption of home country or foreign country perspective..............................................5
Any value addition to the company from project?..............................................................6
Exchange Rate Volatility impact on the value created for HMS.....................................6
Method of Financing the project?..............................................................................................6
Conclusion.........................................................................................................................................6

Overview of Company
Hatfield Manufacturing Systems Plc is an engineering firm which deals in the
design, development and manufacture of additive layer manufacturing systems
(3D Printing).The company is not only involved in the manufacturing and selling
of 3D print machines to other engineering firms but also engaged in supplying
components to aerospace and motor vehicle industries on a research and
development basis. The supplying of components to aerospace and motor
vehicle industries has been so successful that the company is giving a thought of
investing in a new plant which will be involved in the manufacture of these
components .The plant is to be located inTurkey.There are few reasons involved
for the location of Plant in Turkey which are listed here in below:
a) The government is keen to attract foreign investment.
b) The government is spending heavily on infrastructure.
c) Turkey has a competitive market and also has a substantial and
developing aerospace sector.
d) The population of Turkey is young and well educated
Hatfield Manufacturing Systems Plc also has number of concerns with respect to
set up of a plant in Turkey which are listed here in below:
a) Will the project be financially viable?
b) Should the company go for home or foreign country perspective.
c) Will the new project add value to HMS Plc.?
d) Will the exchange rate volatility impact on the value created for the
company?
e) Means to finance the project.
Analysis
In order to analyse the financial viability of the project, Capital Budgeting is
considered to be the most appropriate tool. It is used in the process of planning
and to determine whether the organization’s long-term investment such as
purchase of new machinery, replacement of machinery is worth of funding
through the entity capitalization structure. There are also many methods
available in capital budgeting which is used to determine the feasibility of the
project. The most common and important one is the Net present value analysis.
Net Present value helps in identification of change in cash flows which is
involved with relation to purchase of fixed assets and the same is discounted to
the present value. All the projects are than compare with the positive NPV and
the project which carries the highest NPV are accepted.
In order to compute the Net Present Value, the following consideration is
involved:

a) Cost of purchase of Machinery is the major outflow involved
b) The machine is depreciated on the basis of Straight-Line Method
c) The revenue of the project is proposed to be increase at the rate of 12
percent.
d) The variable cost of the project includes labour cost and other variable
cost. The labour cost is proposed to be increase at the rate of 2 percent
every year. The other variable cost of the company is proposed to be
increase at the rate of 1.5 percent every year.
e) The fixed cost involved is proposed to be increase at the rate of one
percent over a period of year.
f) The tax rate has been taken at the rate of 19 %
g) Risk premium assumed at the rate of 5%
h) Cost of debt involved is assumed at the rate of 6%
On the basis of the above proposed layout the feasibility of the project analysis is
carried out in order to determine the worthiness of the project under three
possible scenarios:
a) When the financing of the project is done on the basis of debt in UK.
b) When the financing of the project is done on the basis of equity
c) When the financing of the project is done on the basis of equity and debt
both.
When the financing of the project is done on the basis of debt in UK.
If the project is financed with overall debt and no equity involved than the overall
debt of the company will increase .This will lead to increase in the cost of interest
and the burden for the same will be increase without any default in yearly
payment to the debt holder of companies .The funding for the project also needs
to be done form the domestic market as the foreign funding is quite expensive
as compared to fund raise from own country. The net present value for the same
has been computed here in under:
Content 0 1 2 3 4 5 6 7 8 9 10
1 Machinery Cost
-
110000000.
00
2 Depreciation
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
3 Revenue
15518000.
00
17380160.
00
19465779.
20
21801672.
70
24417873.
43
27348018.
24
30629780.
43
34305354.
08
38421996.
57
43032636.
16
4
Variable Cost of
Production
Labour Cost
-
513450.00
-
523719.00
-
534193.38
-
544877.25
-
555774.79
-
566890.29
-
578228.09
-
589792.66
-
601588.51
-
613620.28
Other Variable Cost
-
953550.00
-
967853.25
-
982371.05
-
997106.61
-
1012063.2
1
-
1027244.1
6
-
1042652.8
2
-
1058292.6
2
-
1074167.0
1
-
1090279.5
1
5 Fixed Cost -1144.00 -1155.44 -1166.99 -1178.66 -1190.45 -1202.36 -1214.38 -1226.52 -1238.79 -1251.18
6 Profit Before Tax
3049856.0
0
4887432.3
1
6948047.7
8
9258510.1
8
11848844.
97
14752681.
43
18007685.
13
21656042.
28
25745002.
27
30327485.
19
7
Tax @19% (Being
higher for UK)
-
579472.64
-
928612.14
-
1320129.0
8
-
1759116.9
3
-
2251280.5
4
-
2803009.4
7
-
3421460.1
7
-
4114648.0
3
-
4891550.4
3
-
5762222.1
9
8 Profit after tax
-
110000000.
00
2470383.3
6
3958820.1
7
5627918.7
0
7499393.2
4
9597564.4
3
11949671.
96
14586224.
96
17541394.
25
20853451.
84
24565263.
01
9 Depreciation
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
10 Cash flow
-
110000000.
00
13470383.
36
14958820.
17
16627918.
70
18499393.
24
20597564.
43
22949671.
96
25586224.
96
28541394.
25
31853451.
84
35565263.
01
11
Discounting Factor
@6% 1.00 0.94 0.89 0.84 0.79 0.75 0.70 0.67 0.63 0.59 0.56
12 Present Value
-
110000000.
00
12707908.
83
13313296.
70
13961121.
18
14653252.
16
15391698.
36
16178613.
15
17016300.
92
17907223.
85
18854009.
20
19859457.
10
13 Net Present Value
49842881.4
4

On the basis of above table, it can be analysed that net present value of the
company is 49 million approx. after considering the discount rate of 6 %. The
extra profit earned will help in the growth prospects of the company and long run
sustenance.
When the financing of the project is done on the basis of equity
If the project is financed with overall equity and no debt involved than the overall
equity of the company will increase significantly .As proposed the cost of equity
is very high as compared to the cost of debt .The funding for the project also
needs to be done form the domestic market as the foreign funding is quite
expensive as compared to fund raise from own country. The management of the
company also needs to consider the impact of foreign exchange fluctuation while
taking the decision. The net present value on the basis of equity has been
computed here in under:
Year
Content 0 1 2 3 4 5 6 7 8 9 10
1 Machinery Cost
-
110000000.
00
2 Depreciation
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
3 Revenue
15518000.
00
17380160.
00
19465779.
20
21801672.
70
24417873.
43
27348018.
24
30629780.
43
34305354.
08
38421996.
57
43032636.
16
4
Variable Cost of
Production
Labour Cost
-
513450.00
-
523719.00
-
534193.38
-
544877.25
-
555774.79
-
566890.29
-
578228.09
-
589792.66
-
601588.51
-
613620.28
Other Variable Cost
-
953550.00
-
967853.25
-
982371.05
-
997106.61
-
1012063.2
1
-
1027244.1
6
-
1042652.8
2
-
1058292.6
2
-
1074167.0
1
-
1090279.5
1
5 Fixed Cost -1144.00 -1155.44 -1166.99 -1178.66 -1190.45 -1202.36 -1214.38 -1226.52 -1238.79 -1251.18
6 Profit Before Tax
3049856.0
0
4887432.3
1
6948047.7
8
9258510.1
8
11848844.
97
14752681.
43
18007685.
13
21656042.
28
25745002.
27
30327485.
19
7
Tax @19% (Being higher
for UK)
-
579472.64
-
928612.14
-
1320129.0
8
-
1759116.9
3
-
2251280.5
4
-
2803009.4
7
-
3421460.1
7
-
4114648.0
3
-
4891550.4
3
-
5762222.1
9
8 Profit after tax
-
110000000.
00
2470383.3
6
3958820.1
7
5627918.7
0
7499393.2
4
9597564.4
3
11949671.
96
14586224.
96
17541394.
25
20853451.
84
24565263.
01
9 Depreciation
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
1
0 Cash flow
-
110000000.
00
13470383.
36
14958820.
17
16627918.
70
18499393.
24
20597564.
43
22949671.
96
25586224.
96
28541394.
25
31853451.
84
35565263.
01
1
1 Discounting Factor @9% 1.00 0.92 0.84 0.77 0.71 0.65 0.60 0.55 0.50 0.46 0.42
1
2 Present Value
-
110000000.
00
12358149.
87
12590539.
66
12839804.
13
13105436.
56
13387003.
60
13684139.
55
13996541.
25
14323963.
35
14666214.
10
15023151.
44
1
3 Net Present Value
25974943.5
2
On the basis of above table it can be analysed that net present value of the
company is 26 million approx. after considering the discount rate of 9 %.The
extra profit earned will help in the growth prospects of the company and long run
sustainence.On the basis of comparison with above table the NPV is decreased to
half as compared to debt financing.

When the financing of the project is done on the basis of equity and debt both
If the project is financed on the basis of mixed capital structure than the entity
debt and equity will be increased and thereby maintaining mixed proportion of
both. As proposed the cost of equity is very high as compared to the cost of
debt. The funding for the project also needs to be done form the domestic
market as the foreign funding is quite expensive as compared to fund raise from
own country. The management of the company also needs to consider the
impact of foreign exchange fluctuation while taking the decision. The net present
value on the basis of mixed proportion of financing has been computed here in
under:
Year
Content 0 1 2 3 4 5 6 7 8 9 10
1 Machinery Cost
-
110000000.
00
2 Depreciation
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
-
11000000.
00
3 Revenue
15518000.
00
17380160.
00
19465779.
20
21801672.
70
24417873.
43
27348018.
24
30629780.
43
34305354.
08
38421996.
57
43032636.
16
4
Variable Cost of
Production
Labour Cost
-
513450.00
-
523719.00
-
534193.38
-
544877.25
-
555774.79
-
566890.29
-
578228.09
-
589792.66
-
601588.51
-
613620.28
Other Variable Cost
-
953550.00
-
967853.25
-
982371.05
-
997106.61
-
1012063.2
1
-
1027244.1
6
-
1042652.8
2
-
1058292.6
2
-
1074167.0
1
-
1090279.5
1
5 Fixed Cost -1144.00 -1155.44 -1166.99 -1178.66 -1190.45 -1202.36 -1214.38 -1226.52 -1238.79 -1251.18
6 Profit Before Tax
3049856.0
0
4887432.3
1
6948047.7
8
9258510.1
8
11848844.
97
14752681.
43
18007685.
13
21656042.
28
25745002.
27
30327485.
19
7
Tax @19% (Being higher
for UK)
-
579472.64
-
928612.14
-
1320129.0
8
-
1759116.9
3
-
2251280.5
4
-
2803009.4
7
-
3421460.1
7
-
4114648.0
3
-
4891550.4
3
-
5762222.1
9
8 Profit after tax
-
110000000.
00
2470383.3
6
3958820.1
7
5627918.7
0
7499393.2
4
9597564.4
3
11949671.
96
14586224.
96
17541394.
25
20853451.
84
24565263.
01
9 Depreciation
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
11000000.
00
1
0 Cash flow
-
110000000.
00
13470383.
36
14958820.
17
16627918.
70
18499393.
24
20597564.
43
22949671.
96
25586224.
96
28541394.
25
31853451.
84
35565263.
01
1
1
Discounting Factor
@7.5% 1.00 0.93 0.87 0.80 0.75 0.70 0.65 0.60 0.56 0.52 0.49
1
2 Present Value
-
110000000.
00
12530589.
17
12944354.
93
13384818.
91
13852355.
46
14347411.
31
14870504.
29
15422222.
49
16003223.
50
16614234.
03
17256049.
67
1
3 Net Present Value
37225763.7
6
On the basis of above table, it can be analysed that net present value of the
company is 37 million approx. after considering the discount rate of 7.5 %. The
extra profit earned will help in the growth prospects of the company and long run
sustenance.
Analysis done on the basis of three scenario it can be analysed that company
plan to invest in the new project is feasible and valuable.
Adoption of home country or foreign country perspective
The Hatfield Manufacturing system Plc should go ahead and opt for home
country perspective. The company shall borrow from the home country market
rather than foreign country market. The image of the company is also not very
strong that any lending institution will lend to the entity very easily such huge
required of capital. After considering the proportion of equity and debt the
company shall consider home perspective to be an ideal option.

Any value addition to the company from project?
On the basis of analysis done above the project is adding value to the company
which will be useful for financials and net profit of the company. As analysed
above all the above three scenarios are adding value to the company. If the
company go for financing on the basis of debt or equity or mixed equity and debt
all the method of financing is contributing value to the company.
Exchange Rate Volatility impact on the value created for HMS
There shall be a major impact on the value created by the company. The rate of
interest also of both countries is quite different. According to the data provide
one can compare and analysed that sterling shall be a stronger currency as
compared to TL in the near future. Heavy fluctuation of foreign currency will
have a huge impact on the feasibility of the project. So, the company shall not
plan to bring back the capital alternatively the entity should plan to borrow
money in foreign market.
Method of Financing the project?
The best method of financing the project shall be a mix proportion of both debt
and equity. This proportion will also keep the balance of both debt and equity in
the books of accounts of the company. As analysed above the proportion of both
will also add value to the company in the long run.
Conclusion
The company Hatfield Manufacturing System Plc should proceed with the project
as it is good to be accepted. There is but major difference in the interest rate in
both countries which the entity should also consider and take into account.