SCHOOL OF BUSINESS

BUSINESS ADMINISTRATION ENGINEERING

MENTION FINANCE

FINANCIAL ANALYSIS
IEG311-4801-2018

N2-U3-U3-FINAL SUMMATIVE EVALUATION U3

Student: ROBINSON MUÑOZ LEIVA

Teacher : PABLO QUEZADA

June 2018
 1. INTRODUCTION
In any project, regardless of its categorization, it is necessary to know, project and
anticipate the possible economic scenarios that it will generate in order to ensure that
the decisions made on the basis of this information are the correct ones, thus
minimizing the risk of deciding without budgeting.
The main objective of evaluating a project is to compare the benefits versus the
projected outlays associated with an investment decision. That is to say, to define,
from the investor's point of view, whether the income is greater than the capital
invested; or, in other words, to define the profitability that the investment will
eventually return.

2. OBJECTIVES
Calculate the profitability of a current and projected flow, based on the basic
profitability indicators of a project, determining which are the most convenient
alternatives that ensure profitability in the expected terms.

3. CASE:

An intercity bus company is evaluating the acquisition of buses for a stretch between
two cities 150 km apart. It is evaluating between 2 brands of Pullman buses.

The data are as follows:

Pullman 1 Pullman 2
Capacity (passengers) 56 48
Initial Investment $ 70.000.000 $ 80.000.000
Cost liter of fuel $ 900 $ 900
Monthly maintenance cost $ 3.500.000 $ 4.400.000
Useful life (years) 3 5
Residual Value (over Initial inv) 50% 20%

• The demand for the passenger segment, including round trips, is 200 people
per day.
• The company makes a total of 3 turns per day in each direction (900 kms). per
day).
• The one-way fare is $1,900.
• The average fuel efficiency of Pullman 1 is 10 KM/LT, that of Pullman 2 is 12
KM/LT.
• The discount rate used by the bus company for its projects is 15%.
• Assume that there are no taxes, income and cost prices are maintained
forever.
• Each work year is 360 days.

4. DEVELOPMENT

Given the above case, to determine which of the two alternatives, Pullman 1 or
Pullman 2, is the most convenient and then the company can make a decision based
on indicators. First, the information should be sorted in order to obtain the following
more refined information

• Determine the evaluation horizon for each alternative under evaluation.

• Determine operating costs, where fuel and maintenance costs are considered.
• Asset depreciation costs

Robinson Muñoz L
3rd year student of Business Administration Engineering with mention in
Finance
AIEP PROFESSIONAL INSTITUTE
 • Determine income for the period(s)
• Develop projected cash flow for each alternative (Pullman 1 and Pullman 2).
• Calculate NPV to determine the economic viability of each alternative.
• Calculate the IRR, to determine the internal rate of return of the project as well
as to ensure that the project will return the investment.
• Calculate PAYBACK to know the time in which this investment alternative will
return the capital.
• Calculate NPV to know the rate at which the investment will return "X" pesos
for each peso invested.

a) Evaluation Horizon
It is essential to determine the Evaluation Horizon in accordance with the
characteristics of the project or asset, with its useful life or with the type of product or
service to be marketed; it is not possible to have a general rule for the estimate
because the evaluation period to be considered in a given project due to its specific
characteristics, considering an infinite life is not optimal for reasons such as the fact
that projects are based on estimates and the longer the horizon, the more effort will
be required to generate them and the greater the risk of error.The continuity of the
company is guaranteed by replacing assets, modifying products, expanding markets,
but these activities in themselves are new projects, with new definitions and specific
evaluation horizons.
For this case, the useful life of the bus with the longest life, i.e. pulman 2, is
considered, which corresponds to 5 years and is the minimum recommended for an
investment evaluation.

b) Operating costs
Production costs, also called operating costs, are the expenses necessary to keep a
project, processing line or piece of equipment in operation. In this case, there are fuel
costs that will be necessary to make the different routes and maintenance costs to
keep the buses in optimal mechanical condition.
As what is required is the annual flow, these values will be calculated from the daily
expenses and costs.
OPERATING COST
Fuel Cost Maintenance Cost Total Cost
Working Rend Km/lt Cost/lt Annual Fuel Monthly Maintenance
Total Fuel
PROJECT days Km/day Km/ Year Consumptio maintenance cost
Cost/ year
Year Comb fuel n (lts) cost Annual Annual
Pullman 1 360 10 $ 900 900 324.000 32.400 $ 29.160.000 $ 3.500.000 $ 42.000.000 $ 71.160.000
Pullman 2 360 12 $ 900 900 324.000 27.000 $ 24.300.000 $ 4.400.000 $ 52.800.000 $ 77.100.000

Robinson Muñoz L
3rd year student of Business Administration Engineering with mention in
Finance
AIEP PROFESSIONAL INSTITUTE
Source: Own elaboration

c) Depreciation of Assets

Depreciation is the mechanism by which the wear and tear of an asset is recognized
as a cost. When an asset is used to generate income, it undergoes normal wear and
tear during its useful life, which ultimately depreciates its value due to wear and tear.

DEPRECIATION
Useful Life
InitialInvValue Rescue Residual Value Dep Total Dep Annual
Years
Pullman 1 3 $ 70.000.000 0,5 $ 35.000.000 $ 35.000.000 $ 11.666.667
Pullman 2 5 $ 80.000.000 0,2 $ 16.000.000 $ 64.000.000 $ 12.800.000
Source: Own elaboration

d) Projected Revenues

Projected revenues are those expected to be obtained from the service or product
sold, for this case the revenues are projected on the demand given that there would
be 200 people per day traveling at a value of $1900 each.

This generates the projected sales.

INCOME
Capacity
Passenger Ticket Value daily income Income Year
passengers demand/Di a
Pullman 1 56 200 $ 1.900 $ 380.000 $ 136.800.000
Pullman 2 48 200 $ 1.900 $ 380.000 $ 136.800.000
Source: Own elaboration

e) Projected Flow

The following table is the projected cash flow for both bus alternatives, net cash flow
is considered given the assumption that there are no taxes and the values in
expenses and revenues are perpetual and it is also considered to sell the buses at the
end of the period.

1 PROJECTED FLOW
Pullman Flow 1 Year 1 Year 2 Year 3 Year 4 Year 5
Operating Income $ 136.800.000 $ 136.800.000 $ 136.800.000 $ 136.800.000 $ 136.800.000
Investment recovery $ 11.666.667
Expenses
Operating cost $ 71.160.000 $ 71.160.000 $ 71.160.000 $ 71.160.000 $ 71.160.000
Depreciation $ 11.666.667 $ 11.666.667 $ 11.666.667 $0 $0
Net $ 53.973.333 $ 53.973.333 $ 53.973.333 $ 65.640.000 $ 77.306.667
PROJECTED FLOW
Pullman Flow 2 Year 1 Year 2 Year 3 Year 4 Year 5
Operating income $ 136.800.000 $ 136.800.000 $ 136.800.000 $ 136.800.000 $ 136.800.000
Investment recovery $ 12.800.000
Expenses
Operating cost $ 77.100.000 $ 77.100.000 $ 77.100.000 $ 77.100.000 $ 77.100.000
Depreciation $ 12.800.000 $ 12.800.000 $ 12.800.000 $ 12.800.000 $ 12.800.000
Net $ 46.900.000 $ 46.900.000 $ 46.900.000 $ 46.900.000 $ 59.700.000
Source: Own elaboration

Robinson Muñoz L
3rd year student of Business Administration Engineering with mention in
Finance
AIEP PROFESSIONAL INSTITUTE
f) Investment Indicators
The investment evaluation indicators are indexes that help us determine whether or
not a project is convenient for an investor. The evaluation for the calculation of these
indexes was carried out considering the minimum 5-year horizon on projected flows
and based on passenger demand.

Pullman 1

Period Pullman 1 FNE (1+I)ⁿ FNE(1+i)ⁿ

0 -$ 70.000.000 0,000000 -$ 70.000.000
1 $ 53.973.333 1,150000 $ 46.933.333
2 $ 53.973.333 1,322500 $ 40.811.594
3 $ 53.973.333 1,520875 $ 35.488.343
4 $ 65.640.000 1,749006 $ 37.529.883
5 $ 77.306.667 2,011357 $ 38.435.076
Totals $ 304.866.667 3,993375 $ 129.198.230
IRR 0,7 Tir >0 the project is profitable and returns the investment plus a profit.
PAYBACK 5 1,1 The investment will be recovered in 1.15 years.
IVAN 5 54,18% Efficiency on resources invested
NOTE The evaluation horizon exceeds the effective useful life of the asset and is therefore
Source: Own elaboration depreciated at year 3.

Pullman 2

Period Pullman 2 FNE (1+I)ⁿ FNE(1+i)ⁿ

0 -$ 80.000.000 0,00000 -$ 80.000.000
1 $ 46.900.000 1,15000 $ 40.782.609
2 $ 46.900.000 1,32250 $ 35.463.138
3 $ 46.900.000 1,52088 $ 30.837.511
4 $ 46.900.000 1,74901 $ 26.815.227
5 $ 59.700.000 2,01136 $ 29.681.451
Totals $ 247.300.000 7,75374 $ 83.579.936

IRR 0,5 Tir >0 the project is profitable and returns the investment plus a profit.
PAYBACK 3 1,6 The investment will be recovered in 1.62 years.
IVAN 2 95,72%Efficiency on resources invested
Source: Own elaboration
ANALYSIS

■ V.A.N.

The resulting NPV in both cases is positive and >0, which indicates that in both
projects there are gains to be made with both investments. and would not be lost
The NPV for Pullman 1 is $129,198,230 and for Pullman 2 it is $83,579,936.
Considering that the rate required by the company is 15%, this rate is the maximum
required to ensure profitability and the IRR should be analyzed to reflect the wide
margin.

If this were the only indicator to determine which of the buses should be purchased, it
would be Pullman 1, given the higher profitability at the end of the period, but it should
also be considered that this bus has a useful life of only 3 years, which means that in
years 4 and 5 there will be no depreciation cost, therefore in those years the income
will increase and the cost will decrease. On the other hand, the risk of continuing to
operate Pullman 1 beyond its useful life stipulated by the manufacturer must also be
evaluated and quantified.

Robinson Muñoz L
3rd year student of Business Administration Engineering with mention in
Finance
AIEP PROFESSIONAL INSTITUTE
 ■ T.I.R.

Recall that the IRR (Internal Rate of Return) is the value of the discount rate at which
the realization of the project is indifferent under the economic perspective, i.e. no gain
and no loss. It is also defined as "indicates the discount rate that equals the present
value of the net cash flows obtained from a project with the investment made for its
achievement". If we were to finance the investment at a cost equivalent to this rate,
the project would neither contribute wealth nor entail any economic cost.

For Pullman 1 we could very well reach a rate of 75% and for Pullman 2 a rate of
53%.

On the other hand, when the IRR is >0; the analyzed project returns the invested
capital plus an additional profit.

■ PAYBACK

Playback or Payback Period is an indicator to evaluate an investment that is also

defined as the period of time necessary to recover the initial capital. It is a static
method for investment evaluation.

In the case of this index, we must consider that it is a static method and that it does
not consider

or any profit or loss that may arise subsequent to the recovery period.
o Does not take into account the difference in purchasing power over time
(inflation).

As a result, for Pullman 1, the recovery of the initial investment would be generated in
1.15 years, that is to say, in 13.8 months of operation.

In the case of Pullman 2, capital recovery would not be achieved until 1.62 years, i.e.
after 19.4 months of operation.

■ IVAN

The Net Present Value index (NPV) will allow us to define the ratio between the profit
delivered by the NPV and the initial investment, i.e. for each peso $ invested, the
amount of pesos earned, and will also allow us to determine which of the two projects
will finally give us maximum profitability and efficiency on the resources invested.

The Pullman 1 option yielded 54.18% efficiency and the Pullman 2 option yielded
95.72% efficiency in the use of resources over the initial investment.

CONCLUSIONS.

If the company's objective and policies are to increase its profits and revenues after 5
years of operation and recover the investment in the shortest possible time, it should
buy Pullman 1, where it should consider that the efficiency in the use of capital will be
54.18%.

If the company's objective and policies are to maximize the use of scarce resources
efficiently over maximizing revenue volume, it should purchase the Pullman 2 where it
should achieve 95.72% resource efficiency over the initial investment.

SUMMARY TABLE

Robinson Muñoz L
3rd year student of Business Administration Engineering with mention in
Finance
AIEP PROFESSIONAL INSTITUTE
Index Pullman 1 Pullman 2
VAN $ 129.198.230 $ 83.579.936
IRR 0,75 0,53
PAYBACK 1,15 1,62
IVAN 54,18% 95,72%
Source: Own elaboration

BIBLIOGRAPHY .
- Contents Unit 3 Financial Analysis AIEP Professional Institute.

Web Bibliography:

- https://www.entrepreneur.com/article/262890

- https://www.gestiopolis.com/indicadores-financieros-para-la-evaluacion-de-proyectos-de-
investment/

Robinson Muñoz L
3rd year student of Business Administration Engineering with mention in
Finance
AIEP PROFESSIONAL INSTITUTE