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Step 7:ProductSelling price (AUD)Estimated variable costContribution margin$5,041,249.00$3,490,095.00$1,551,154.00$4,847,355.00$2,714,518.00$2,132,838.00$200,951.00$148,790.00$52,161.00For my company, I have chosen 3 cars designed by Pininfarina. Of these three cars, 1 is made for Pininfarina themselves and the other two have been designed for other companies. The estimated variable cost is exactly that, an estimation. This is purely for the fact that trying to find out how much cars cost to produce is near impossible. Things I took into consideration when determining the pricing included:What materials were used?How much of the material was used?How much electronics are inside the car?How old is the technology going into the cars?How many cars are being produced?After gauging a rough price for all the materials used in designing and creating the car, I took that away from the selling price to determine the contribution margin per unit sold. Pininfarina are in a unique position in the automotive industry as most of the cars they sell are through collaborations with other companies. The ranging contribution margin varies from car to car for a very good reason. Cars that are built in bulk production are generally cheaper to make as the company can get discounts on bulk buying items. Take for example the Karma GT, this car is sold predominately in the US and isn’t a limited supply vehicle whereas the H2 Speed has a limited build of 15. The technology going into the H2 is fairly new and as Tesla own the monopoly of FEV, Pininfarina are required to build their software from scratch which cost a lot of money. The hybrid system going into the Karma GT is relatively cheap as the technology has been around for many years which clearly results in a cheaper production cost. The thing with cars (more so exotic super cars) is that the more that are produced, the lower their value. Limited production generally increases value of the car meaning contribution margin will be greater than a mass production vehicle. Take for instance the 2018 Volkswagen Golf R Special Edition ($58,990) vs a 2018 Volkswagen Golf R ($53,990). Same car but limited edition involves a $5k variance.Personally, the way that cars are going with all the technological advances in software, computers inside the vehicle and autonomous aspect of cars, a resource constraint could be the very thing everyone is after in a car. Technology. See, software is out there, and there is always a race to develop the next best thing but with the development comes testing, implementing and then correcting. Pininfarina are up against some of the greatest brands in hybrid and fully electric car sales so this technological constraint could play a massive role in identifying which car to sell. On top of that, market demand is a major constraint.You think about it, if someone says, “I’m thinking of buying either a Toyota or a Triton”, everyone says “Get a Toyota, they are well known for not dying”. Now imagine if I start a brand and invest $140k into a car and ask people to buy it for $200k but I’m new to the industry. People would much rather buy a Mercedes-Benz AMG GT 63 S for a slightly higher price of $261k because it is a well-known brand.Market is one of the biggest constraints to an automotive company as without the customers, the company goes bust.Step 8:Share price information was only available in the 2018 annual report meaning I was required to use London Stock Exchange to obtain the share prices for 2015-2017.I was able to find 31/12/2015 easily however for 31/12/2016, LSE showed no data so to come to $1.26 per share, I looked at the closing figure on 30/12/16 and opening figure on 02/01/2017. As the closing and opening balance were different, I made the decision to use the closing figure on 30/12/2016 as the share price for 31/12/2016. The same issue arose for 31/12/2017 so I selected the closing share price at 29/12/17.Searching for the WACC, Pininfarina’s annual reports mentioned ‘discount rate’ under the engineering branch but not automotive. WACC showed 3 results but 2 was also for the engineering side of the business and 1 was for impairment of non-financial assets. As a result, 10% has been used.After finally finishing off all my ratios, I was looking at the figures and to be honest, I was expecting 2015 to be completely sideways in regards to making sense. As Pininfarina’s Parent Company went into liquidation in 2015, I was expecting the ratios to show A LOT of debt over profit so when I see a ratio like 1127.17% of debt to equity, I wasn’t surprised. Pininfarina’s new parent company Mahindra paid nearly half the debt owed by Pininfarina so expected 2016 to show strong figures. 2017 as a whole went a little backwards in my eyes and it may come down to stock. When looking at days of inventory, 2016 showed nearly 3 weeks for inventory to clear whereas 2017 showed just 11 days. Matching up the puzzle pieces, quick timeframe to clear inventory and low profit shows that 2017 wasn’t an overly productive year. On a positive note though, they were able to halve their debt/equity ratio. 2018 showed signs of improvement and personally I believe its due to 4 cars being showcased at SEMA Car Convention which obviously raises interest in the company. As it can be seen, debt/equity ratio continued to decrease, profit margin increased, and the investors saw an increase in returns on their shares.When comparing the RNOA and ROA, the anomaly out of all 4 years would be 2016 where ROA was higher than RNOA and I believe that is due to a saving of $26.5m on the extinguishment of financial liabilities. Having a higher RNOA for Pininfarina makes sense as their business revolves around the design and building of vehicles so would be more asset heavy compared to a say a digital marketing paring the net profit margin (NPM) against the profit margin (PM) again showed a consistent trend where the income generated from operations gave a greater return than the net profit overall. There is a rough 2-3% variance between Profit Margin and Net Profit Margin favouring the Profit Margin excluding 2016 due to the $26.5m gain in financial revenue. Pininfarina have had a rough couple of years recently due to the liquidation of one parent company and the takeover from Mahindra. This reflects in the figures both negatively and positively however a constant trend is identifiable when looking at the ratios. Pininfarina is an asset heavy company as they build physical vehicles meaning their main income source is operational rather than financial.Asset turn over showed all figures over 1 which is good because it means its greater than a 1:1 ratio. For the ratio to be over 1, it means that for every dollar of sale, it is attributable to a dollar of operating assets. When adding financial assets into the mix, it decreases the ratio to below .70 across all 4 years and I believe this is due to the high figures of financial assets. When looking at TATO, it indicates a decreasing trend meaning an increase in assets but lower figure for sales. On the other hand, ATO shows an increasing trend which is positive as it promotes sales of assets resulting in profitability. The anomaly identified for ATO is 2018 which is understandable as Pininfarina released 4 cars meaning assets will increase suddenly and the sales figure will increase gradually.Economic profit was a little bit of a tricky one to identify a standard trend (positive or negative) at first glance as the figures increase dramatically, decrease then increase again. When I took the time to look into the company and understand why, it became clear and you are probably going to get sick of me saying this but with Mahindra taking over 75% of the company and paying nearly 50% of Pininfarina’s debt in 2016, their profitability went from -$22m (in 2015) to -$557k (2016). That is a crazy 38x increase in profitability. One thing that is identifiable throughout all the ratios is when the company has an active year manufacturing vehicles, their profitability increases.If you have a look at the 4 years together, you see the following:Year2018201720162015Economic profit$ 1,338,714.41-$ 1,541,992.77-$ 556,635.76-$ 22,176,270.25Cars released4120It is clearly identifiable that profitability for Pininfarina is reliant on the number of cars released in that year. 2016 sees 2 cars released and a major spike in profitability. 2017 has 1 car released which decreases economic profitability due to the slow growth of assets to sell then 2018 sees 4 cars released and is the first of 4 years where Pininfarina has a positive economic profit. By breaking the whole annual report into bite size sections, I really believe that I have gained a clear understanding of my company. I had a basic understanding that more cars equals more money however it was interesting to see that between 2016 and 2017, the number of cars released was halved (went from 2 to 1) yet the profitability dropped by $1m. The thing that puzzles me about the $1m drop is why wasn’t it more? Or less? Is $1m a ‘standard’ drop in profitability? Understandably, 2016 sees double the asset growth as there are two cars to be produced and on sold whereas 2017 has half the assets coming in which overall decreases profitability. 2018 saw nearly 200% increase in profitability and is due to the decrease in liabilities and increase in assets.Step 9:Pininfarina have recently released the Battista and confirmed a future range of electric cars which is an exciting opportunity for the company. To keep up with the future demand for vehicles, Pininfarina will be required to open a new production facility but the location is vital to reducing costs incurred by Pininfarina. The two locations in mind are America and Italy, Italy for the purpose of staying close to the root of the business and America for the cheaper costs of materials.The following options are available for the business to consider regarding how to reduce costs:Buy the Ohio GM factory that has been shut down and refit it for Pininfarina molds. Warehouse is already established and has the capacity to build standard sized cars up to large SUVs.Build a new production plant in Italy to stay close to the root foundations of the company.Things to take into consideration with this decision is how much money is going to be spent for the initial set up before any money can be made. As Pininfarina uses Euro as currency, this will play a vital role in deciding where to build the new production factory.Pininfarina are known to make limited number vehicles but for this investment option, let’s say that they plan to make 3 vehicles continuously. As car molds are different for each car, each location will require brand new equipment to be installed before the production of the first car can commence. Customer base is no issue as Pininfarina are established through collaborations with other companies throughout the world. There is an engineering and design firm in each location (Italy and America) meaning there will be no delays or hold ups when waiting for another section of the company to perform their part.The investment options would commence January 1, 2021 and estimated future cash flows are expected to be received before December 31 each year. The Ohio factory is expected to be sold after 6 years due to structural integrity of the building and will require a new factory to be purchased. The Italian factory will be built to withstand 8 years of constant production before renovations will need to take place.The initial investment cost, estimated residual value, expected useful life of the investment, and expected future cashflows for both options are shown in the table below. I applied a 10% discounted rate / WACC. All monetary values are in Euros.Ohio Factory Purchase and RefitmentItalian Factory ConstructionINITIAL INVESTMENT COST-€500 million-€755 millionRESIDUAL VALUE€150 million€260 millionESTIMATED USEFUL LIFE6 years8 yearsESTIMATED FUTURE CASH FLOWSYEAR 1 (2021)€48 million€75 millionYEAR 2 (2022)€74 million€109 millionYEAR 3 (2023)€101 million€158 millionYEAR 4 (2024)€150 million€226 millionYEAR 5 (2025)€150 million€230 millionYEAR 6 (2026)€165 million€234 millionYEAR 7 (2027)€280 millionYEAR 8 (2028)€310 millionLooking at the above information, I am able to analyse which investment decision is most beneficial for Pininfarina. The first analysis is payback period which looks at how long it takes to recoup the cost of an investment. The second analysis is known as Internal Rate of Return (IRR) and shows the expected rate of return of the initial investment as a percentage whilst considering the value of future cashflow. Lastly, the Net Present Value (NPV) compares the amount invested against the expected cashflow in return as a dollar figure by discounting the expected returns to a rate applicable to today.Below you will find the outline for the investment opportunities.Option 1: Ohio FactoryPayback periodPayback period looks at how long it takes for the company’s investment to show returns which match the initial investment. For Investment Option 1 – Ohio Factory, the expected payback period is 4 years and 309 days which is nearly 81% of the life of operation for the factory itself.Internal Rate of Return (IRR)The IRR shows the expected returns on capital investment that a company is projected to make as a percentage. As the WACC is generally 10%, any investment option that returns an IRR of below this is generally deemed not worth it. From the figures above, if Pininfarina were to invest in the Ohio Factory, they would make a return of 8.2% which is below the WACC of 10% meaning this is something to take into consideration when deciding which project to Present Value (NPV)Net Present Value looks at the expected cashflow during an operations life and then calculates it into a current value of money and compares it to the initial investment. The benefit of this is to see if the operation itself will improve profitability to shareholders and the company or decrease value. Looking at the figures above, although the company will make €688 million (€188 million more than the initial investment), the present rate equates to -€30.6 million. Option 2: Italian FactoryPayback PeriodThe payback period for the Italian Factory is 4 years and 297 days which is roughly 60% of the project life.Internal Rate of Return (IRR)The IRR of the Italian Factory is 16.5% which is a solid return rate. As this is 6.5% over the WACC, this is a positive aspect to the project and needs to be taken into Present Value (NPV)The NPV of this project is projecting a profitable value to the shareholders and company with a sum of €239.5 million.Investment analysisBased on the breakdown above, it is clear to see that there is one project that stands out. Things that had to be taken into consideration were current market trends, trade deals between countries, what the current economy of each country is now and many more factors. Mahindra own a steel production company which means that Pininfarina will be able to acquire cheap steel to produce cars. Importing that steel to each country however can significantly increase the price which needs to be taken into consideration. Although USA imported $334.32 billion worth of goods from India compared to the $29.08 Italy imported, Italy is closer in distance meaning freight costs will be reduced significantly.Looking at the payback period, I believe it is an irrelevant calculation for the two options as the time variance is 13 days is insignificant therefore, I have chosen to exclude this calculation from the decision-making paring the two IRRs, the Italian factory is returning a rate of 16.5% which is over double the Ohio factory of 8.2%. As the investment option should return a positive rate of return and the current requirement sits at 10%, the Italian investment exceeds this requirement by 6.5% which is good for the investors. Ohio is showing a return rate of 8.2% which would impact negatively towards the shareholders profits.NPV for Ohio is showing at -€30.6 million which means it is decreasing value from the company whereas the Italian Factory is showing an NPV of €239.5 million. As the NPV of the Italian Factory is showing a significant gain for the company, I am recommending that Pininfarina invest in a new production factory in Italy. My recommendation is based purely on assumptions made about future cash flow figures which can be affected at any time from events that are outside of the companies control such as trade deals or sanctions, construction running over budget, etc.Profitability for Pininfarina can be affected both positively and negatively throughout the course of the projects life from circumstances outside of anyone’s control however as the current figures sit, based on the NPV and IRR, the Italian factory option will give Pininfarina the best returns profit wise. ................
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