Tools for Financial Consultancy: Du Pont Analysis and Project PMD Evaluation

Part A: Du Pont Analysis for Return on Owners Equity Calculation

Download annual report of EXXON MOBILfor the year 2017. You can access it from the URL 

Or MDIS Black Board. You have been appointed as a consultant to prepare a report for consideration by the Board of Directors on details of and changes over two years to the ratio relevant to the shareholders namely Return on Owners Equity (ROOE). 

Required:

i) Using Du Pont Analysis, compute the ratios for two consecutive years covered by the annual report. Calculate Return on Owners Equity (ROOE) further analysed into Return on Sales, Total Asset Turnover ratio, Gearing Ratio. Both Return on Sales, Total Asset Turnover ratio can be further drilled down using 3 and 7 ratios respectively

ii) Your report analyzing changes in figures over 2 years. Scope of analysis covers changes in Return on Owners Equity (ROOE) further explained by changes in profitability, asset turnover and leverage ratios.

Critically evaluate the statement “Debt is always cheaper than equity so companies must go for maximum debt to minimize their cost of capital”.

SENTO Corp is a theme park company considering investing in Personal Mobility Devices (Project PMD) equipment to be rented out to tourists visiting Sentosa Island (Singapore’s most famous tourist attraction).

The relevant information and data for the new investment Project PMD are as follows:

a. The new equipment costs $ 200,000 and is usable for 6 years.

b. $16,000 has been already spent on confirming the feasibility of the business idea.

c. $18,000 retainer fee has been guaranteed to be paid at end of year one to a business consultant whether or not the project is launched.

d. Running and maintenance costs will amount to $11,000 per annum.

e. Working capital requirement in total have been estimated as follows;

f. All working capital will be released /recovered at the end of project.

g. Use of PMD by company staff during off peak period will save the company $9000 per year. h. Additional sales orders from customers are expected to contribute $140,000 per year in the first 2 years, $ 150,000 in the third year declining at the rate of $15000 per year for subsequent 3 years. i. SENTO Corp will have to incur additional fixed cost of $30000 per year directly as a result of this project.

j. $13,000 of annual fixed cost will be allocated from general cost to this project.

k. The equipment can be sold at $ 18,000 at the end of its useful life.

l. The extra contribution earned by the other division directly as a result of this project is $18000 per year.

m. The project will be administered from a site that is currently earning annual rental income of $11,000.

n. The project will be administered by a manager drawing salary of $60,000 per year who is expected to devote 25% of his time on this project.

o. Another equipment which was meant to be sold for $30,000 today will be retained for this project for another 6 years after which it will be sold for $5,000.

p. Annual maintenance contract of $7,000 for this equipment will be extended for another 6 years.

q. A project support officer drawing an annual salary of $25,000 was supposed to be retrenched today will be retained to work on this project at the same salary. The retrenchment benefit of $10,000 would be delayed till the end of the project life.

r. Annual tax payment for this project is expected to be $15,000 for first year and growing at a rate of $2,000 per each year.

s. The project will be financed by borrowing $250,000 at 6% interest p.y..

t. The required rate of return for the project is 10%. 

Required

i) For the proposal of Project PMD, show relevant cash flows from the project. Justify exclusion of each irrelevant cash flow exclusion of each irrelevant cash flow.

ii) Calculate (with detailed workings);

a) Accounting Rate of Return (on initial investment)

b) Payback Period

c) Discounted payback period.

d) Net Present Value

e) Profitability Index

f) Internal Rate of Return (IRR). (Use 10% & 20% to approximate IRR)

iii) Critically evaluate “ project evaluation decisions make or break a company”.