VIA University College

Examination
FCM 1
Monday, 12 June 2017, at 09:00-12:00
The student brings: All aids are allowed.

The College supplies: The examination is in WISEflow

Enclosure(s) with assignment: None

Supplementary information: See below

SEE SUBSEQUENT 3 PAGES.

PLEASE NOTE THAT APART FROM ACCESS TO WISEFLOW, INTERNET ACCESS IS

NOT ALLOWED.

PLEASE NOTE THAT MOBILE PHONES ARE NOT ALLOWED.

Please write your name, study number and total number of

pages on the first page of your uploaded paper.

Task A (weight: 35% of the grading)

Task B (weight: 40% of the grading)

Task C (weight: 25% of the grading)

FCM Summer Exam 2017

Part A

Trespa International is a global, leading manufacturer in the wood sector. Trespa´s speciality is to
make panels for exterior cladding, decorative facades, and scientific surface solutions.

In the production of the panels, the company has experienced increased productivity by using
forklift trucks rather than manually operated lift pallet.

The company currently uses a Diesel forklift truck bought at a price of EUR 200,000. By using a
truck rather than a lift pallet leads to improvements primarily in efficiency that saves the
company EUR 88,000 per year. On the other hand, it cost the company EUR 31,000 per year to
operate the truck (including gas, oil changes, maintenance, etc.) increasing by 15% per year. The
truck has a technical time span of 8 years and is being depreciated per the declining-balance
method at a fixed rate of 25%, which correspond to the actual loss of market value.

A.1. What is the internal rate of return for this investment? Explain what information you can
draw from analyzing this.

A.2. Does the investment satisfy the company´s requirement of a return of 5% per year? Why
will a company set up such a requirement? And would you consider this an important
decision making technique for the company? Why / why not?

Trespa International operates with a weighted average cost of capital of 9% per year. It is
assumed, that the Diesel truck can be sold at any time for it´s depreciated market value.

A.3. What is the optimal time to replace the Diesel forklift truck with a similar one?
FCM Summer Exam 2017

Additional information drawn from the annual report of Trespa International:

Trespa’s management and employees put the License to Operate (LTO) first in their strategic priorities.
Trespa’s LTO includes:

 Health and safety of its employees and the local community.

 Product compliance to meet regulatory requirements.
 Transparent reporting and appropriate behaviour by employees.
 Sustainability and the preservation of the environment.

 “Trespa aims to reduce the energy consumption by 8% at the end of 2020 compared to ref-
erence year 2015 in line with the Multi Year Agreement of the Dutch government with the
industry EEP 2015-2020)”. This means e.g. that all Diesel trucks are to be replaced in the
near future with an energy efficient solution based on best available technology”. However
all investments are required to yield a minimum ARR of 5%.

Although the LTO is ultimately the responsibility of the top management at Trespa, commitment of all
employees is required to ensure that these issues are properly addressed. Sustainability became part of
Trespa’s LTO strategy in 2010, following an initial survey of the environmental impact of the produc-
tion site.

Objective and fact based

Trespa believes in objective and fact based analysis and uses a Life Cycle Analysis (LCA) to map its
environmental footprint.

Integral part of business planning and review cycle

Trespa will set priorities based on its LCA and agree to realistic but challenging targets to achieve
change. All sustainability initiatives have been integrated into Trespa’s rolling business planning and
review cycle in line with other license to operate topics.
FCM Summer Exam 2017

Part B - Note: this exercise should be calculated separately from Part A

Trespa International just spend EUR 10,000 on researching the market for more energy efficient
solutions. One thing that was found was that electric forklift trucks are now available by the Italian
producer Carer. In short, Carer's electric forklift trucks offer all the benefits associated with using
electric technology without affecting top performan-ce levels and long operating time. The
benefits are the following:

 No harmful emissions for the environment and worker health

 Less vibrations and noise
 Greater energy efficiency compared with internal combustion engines

Costs and savings related to investing in an electric forklift truck are:

1000 Euro
Price of a new electric forklift truck: 300
Efficiency savings (identical to a Diesel forklift truck) 88 p.a.
Operation and maintenance costs (fixed service arrangement) 42 p.a.
Market Research 10

The new truck will be financed purely by loan capital (cost of debt is 6%). The truck has an
estimated life time of 8 years, and has no scrap value.

B.1. Would you recommend Trespa International to invest in the new electric forklift truck?
Base your argumentation on both financial and non-financial data.

B.2. What is the maximum (1) price and (2) service arrangement fee the company should pay, in
order for the electric forklift truck to be a profitable investment?

B.3. What would happen to the company´s gearing ratio and weighted average cost of capital
when financing 100% by loan capital?
FCM Summer Exam 2017

Part C

Trespa’s annual accounts show the following key figures for their newest product line.

1000 Euro
Sales 36,000
Cost of Goods Sold 24,000
Overhead costs 8,000
Operating Profit 4,000

All Sales are done on Credit terms. On average customers pays after 60 days. All Costs of Goods
Sold are purchased from suppliers. Payment terms to suppliers are 45 days. Average inventory
days for finished products are 50 days.
Sales to customers and purchase from suppliers are evenly distributed over the 12 calendar
months of the year.

C.1. What is Trespas’s Operating Cash Cycle calculated in days?

C.2. What can Trespa do to reduce the level of Working Capital required for running the
business?

Instead of having the products for the product line mentioned above produced by suppliers
Trespas has recently made a decision for starting assembling the products themselves. To be able
to do that they have invested in new machines for a total amount of 4 Million Euro to be paid in
equal installments the first two months of production.
After the new production capacity have been fully implemented, the annual key figures will be as
shown below:
1000 Euro
Sales 36,000
Raw materials 17,000
Direct Labour 5,600
Overhead costs 9,000
Operating Profit 4,400

Trespa have further re-negotiated the payment terms with their suppliers of raw materials to be
60 days and have decided for the following inventory policy for raw materials and finished goods:

 100 % of the raw materials needed for the production in the current month needs to be in
inventory by the end of the previous month.
 100 % of the finished products planned to be sold in the current month needs to be ready in
finished products inventory by the end of the previous month.

Customers are still expected to pay in average 60 days after delivery.

FCM Summer Exam 2017

C.3. Make a monthly cash flow budget for the first 9 months after the decision to start own
assembling of the products.