61FIN3FMO – FINANCIAL MODELING

REVISION_2023

Concept to be learned: Exploratory Data Analysis, Financial Modeling, Optimization.

Skills to be learned: Analytical skills, Problem Solving, Critical Thinking.
Activity 1: Compensation Plan
You are required to draft bonuses for the year-end at Company COSCO. You have decided
to create an Excel spreadsheet to complete this task. The following information has been gathered:
Bonus System
The total bonus includes both performance bonuses and seniority bonuses.
Performance Bonuses:
The performance bonus is determined based on the performance score (P) in relation to the
employee’s position, as follows:
For Director and General Director:
• If 0 < P < 50, a bonus of 20,000 will be awarded.
• If 50 ≤ P < 80, a bonus of 40,000 will be awarded.
• If P ≥ 80, a bonus of 70,000 will be awarded.
For Manager and Senior Manager:
• If 0 < P < 50, a bonus of 5,000 will be awarded.
• If 50 ≤ P < 80, a bonus of 10,000 will be awarded.
• If P ≥ 80, a bonus of 20,000 will be awarded.
For Expert & Staff:
• If 0 < P < 50, a bonus of 1,000 will be awarded.
• If 50 ≤ P < 80, a bonus of 2,500 will be awarded.
• If it is P ≥ 80, a bonus of 5,000 will be awarded.
Seniority Bonuses:
The seniority bonus is determined based on the number of years (S) an employee has been
working for the company, as follows:
• If 0 ≤ S < 1, the employee will receive a bonus equal to one month’s salary.
• If 1 ≤ S < 3, the employee will receive a bonus equal to 1.5 months’ salary.
• If 3 ≤ S < 5, the employee will receive a bonus equal to 2 months’ salary.
 • If 5 ≤ S < 10, the employee will receive a bonus equal to 3 months’ salary.
• If S ≥ 10, the employee will receive a bonus equal to 5 months’ salary.
End-of-year bonus
1 2 3 4 5 6 7
No Name Position Department Salary Joining date Performance score
1 James Manager Marketing $10,000.00 8/9/2018 90
2 Olivia Senior Manager Sales $20,000.00 6/3/2009 70
3 William Director Finance $30,000.00 8/2/2020 60
4 Emma Director Sales $30,000.00 12/3/2006 52
5 Benjamin Staff Human Resources $5,000.00 25/4/2001 32
6 Ava Staff Sales $4,000.00 9/12/2015 60
7 Lucas Senior manager Sales $20,000.00 9/5/2018 95
8 Isabella Expert Marketing $7,000.00 8/3/2013 90
9 Henry Staff Accounting $4,000.00 30/11/2016 54
10 Sophia Manager Marketing $13,059.00 22/11/2017 90
11 Alexander Senior Manager Sales $11,665.00 20/5/2008 44
12 Mia Director Finance $28,152.00 24/4/2019 55
13 Michael Director Sales $17,656.00 26/5/2005 22
14 Charlotte Staff Human Resources $21,740.00 9/7/2010 77
15 Ethan Staff Sales $22,223.00 23/2/2015 100
16 Amelia Senior manager Sales $18,076.00 23/7/2017 34
17 Daniel Expert Marketing $15,391.00 22/5/2012 77
18 Harper Senior manager Accounting $15,423.00 13/2/2016 77
19 Jacob Expert Finance $19,566.00 5/2/2017 77
20 Lily Senior manager Sales $4,973.00 3/8/2007 33
21 Samuel General Director General Director $40,000.00 9/1/2019 80

Solution:
No Name Position Department Salary Joining date Performance score Seniority Months Bonus Seniority bonus Perfomance bonus Total bonus
1 James Manager Marketing $10,000.00 8/9/2018 90 6.3 3 $30,000.00 $20,000.00 $50,000.00
2 Olivia Senior Manager Sales $20,000.00 6/3/2009 70 15.8 5 $100,000.00 $10,000.00 $110,000.00
3 William Director Finance $30,000.00 8/2/2020 60 4.9 2 $60,000.00 $40,000.00 $100,000.00
4 Emma Director Sales $30,000.00 12/3/2006 52 18.8 5 $150,000.00 $40,000.00 $190,000.00
5 Benjamin Staff Human Resources $5,000.00 25/4/2001 32 23.7 5 $25,000.00 $1,000.00 $26,000.00
6 Ava Staff Sales $4,000.00 9/12/2015 60 9.1 3 $12,000.00 $2,500.00 $14,500.00
7 Lucas Senior manager Sales $20,000.00 9/5/2018 95 6.7 3 $60,000.00 $20,000.00 $80,000.00
8 Isabella Expert Marketing $7,000.00 8/3/2013 90 11.8 5 $35,000.00 $5,000.00 $40,000.00
9 Henry Staff Accounting $4,000.00 30/11/2016 54 8.1 3 $12,000.00 $2,500.00 $14,500.00
10 Sophia Manager Marketing $13,059.00 22/11/2017 90 7.1 3 $39,177.00 $20,000.00 $59,177.00
11 Alexander Senior Manager Sales $11,665.00 20/5/2008 44 16.6 5 $58,325.00 $5,000.00 $63,325.00
12 Mia Director Finance $28,152.00 24/4/2019 55 5.7 3 $84,456.00 $40,000.00 $124,456.00
13 Michael Director Sales $17,656.00 26/5/2005 22 19.6 5 $88,280.00 $20,000.00 $108,280.00
14 Charlotte Staff Human Resources $21,740.00 9/7/2010 77 14.5 5 $108,700.00 $2,500.00 $111,200.00
15 Ethan Staff Sales $22,223.00 23/2/2015 100 9.9 3 $66,669.00 $5,000.00 $71,669.00
16 Amelia Senior manager Sales $18,076.00 23/7/2017 34 7.4 3 $54,228.00 $5,000.00 $59,228.00
17 Daniel Expert Marketing $15,391.00 22/5/2012 77 12.6 5 $76,955.00 $2,500.00 $79,455.00
18 Harper Senior manager Accounting $15,423.00 13/2/2016 77 8.9 3 $46,269.00 $10,000.00 $56,269.00
19 Jacob Expert Finance $19,566.00 5/2/2017 77 7.9 3 $58,698.00 $2,500.00 $61,198.00
20 Lily Senior manager Sales $4,973.00 3/8/2007 33 17.4 5 $24,865.00 $5,000.00 $29,865.00
21 Samuel General Director General Director $40,000.00 9/1/2019 80 6.0 3 $120,000.00 $70,000.00 $190,000.00
$1,639,122.00
 Activity 2: Big Rig Rental Company
The Big Rig Rental Company is up for sale at a price of $400,000. The owner, Tom
Grossman, is seeking assistance in developing a five-year economic analysis to help potential
buyers evaluate the company.
The rental rate for the 50 trucks is set at an optimal $11,200 per truck per year and is
expected to remain stable over the next five years. At the end of the five-year period, it is assumed
that the buyer will sell the business for cash, with the estimated selling price being three times the
gross revenue in the final year.
The cost of maintaining the truck fleet is approximately $4,800 per truck per year, covering
expenses like inspection fees, licenses, and routine maintenance. Big Rig also incurs fixed office
costs of $60,000 per year and annual property costs of $35,000. The property costs are projected
to increase at a rate of 3% per year, while maintenance costs are expected to rise by 9% annually
due to the fleet's aging. However, office costs are anticipated to remain constant. Profits are subject
to a 30% income tax, with no tax applied if the profit is negative.
Cash flow in the final year includes proceeds from the sale of the business. As the trucks
have all been fully depreciated, there are no complex tax implications, and revenue from the
business sale is effectively taxed at the 30% rate. The buyer’s investment profit is defined as the
Net Present Value (NPV) of the annual cash flows, calculated at a discount rate of 10%. All
operating revenues and expenses are in cash. The NPV calculation considers the purchase price at
the beginning of year 1 and net income from operations (including the sale price in year 5) over
the five years. There will be no purchases or sales of trucks during this period.
 Requirements:
1. Design and create a spreadsheet to determine the Net Present Value (NPV) of cash
flows over the five-year period.
2. Determine the internal rate of return (IRR) for the cash flows.
3. Construct a table to illustrate how profit changes with variations in the base rental
rate per month and the discount rate. (The discount rate varies from 4% to 16%, with increments
of 2%, and the rental rate varies from $5,000 to $17,000, with increments of $2,000).
4. Create an NPV profile.
5. Consider different business scenarios: the company can rent 100% of the trucks in
a strong business environment, 80% in normal circumstances, and only 40% in a poor market
condition. Analyze how these scenarios affect the NPV.
Solution:
𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − (𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝑐𝑜𝑠𝑡𝑠 + 𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝐶𝑜𝑠𝑡𝑠)
𝑇𝑎𝑥 = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 ∗ 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒
𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 − 𝑇𝑎𝑥
NPV $809,037.43
IRR 49%
Discount rate
$809,037.43 4.00% 6.0% 8.00% 10.0% 12.00% 14.0% 16.00%
$ 5,000 $ (511,563) $ (519,161) $ (525,250) $ (530,060) $ (533,785) $ (536,592) $ (538,618)
$ 7,000 $ 77,239 $ 32,336 $ (7,640) $ (43,306) $ (75,189) $ (103,745) $ (129,368)
$ 9,000 $ 587,344 $ 508,331 $ 437,447 $ 373,714 $ 316,285 $ 264,429 $ 217,509
Rental rate $ 11,200 $ 1,120,000 $ 1,005,300 $ 902,101 $ 809,037 $ 724,929 $ 648,751 $ 579,612
$ 13,000 $ 1,555,809 $ 1,411,910 $ 1,282,272 $ 1,165,211 $ 1,059,273 $ 963,195 $ 875,878
$ 15,000 $ 2,040,041 $ 1,863,700 $ 1,704,684 $ 1,560,960 $ 1,430,767 $ 1,312,578 $ 1,205,062
$ 17,000 $ 2,524,273 $ 2,315,490 $ 2,127,096 $ 1,956,708 $ 1,802,261 $ 1,661,961 $ 1,534,246

Scenario Summary
Current Values: Good Normal Bad
Changing Cells:
renting rate 100% 100% 80% 40%
Result Cells:
NPV $809,037.43 $809,037.43 $365,799.05 ($657,679.20)
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.
 Activity 3: Brown Furniture Company
Brown Furniture Company manufactures three types of office furniture: chairs, desks, and
tables. Producing each of these items involves a combination of skilled labor in the parts
fabrication department, unskilled labor in the assembly department, the use of machining
equipment for specific components, and the utilization of wood as raw material. The company is
currently aware of the unit profit contribution for each product, and it has no trouble selling
everything it produces. The workforce size, along with the corresponding skilled and unskilled
labor hours, is fixed. Additionally, the available time on the essential equipment has been
determined, and there's a set wood supply under contract with a supplier. The management team
at Brown Furniture aims to maximize their monthly profit contribution by determining the
production quantities for chairs, desks, and tables. The information below provides an overview
of the problem's parameters.
Requirement per unit
Chairs Desks Tables Resouces available
Fabrication (hr) 4 6 2 2000 hr
Assembly (hr) 3 8 6 2000 hr
Machining (hr) 9 6 4 1440 hr
Wood (Sq.ft) 30 40 25 9600 sq.ft
Profit per unit $ 16 $ 20 $ 14

The company markets its furniture through a distributor who provides monthly demand
forecasts. It's also important to note that the Marketing Department mandates that each product
must account for at least 20% of the total units sold.
Chairs Desks Tables
Demand 300 120 144

Your task is to create a decision-making model to assist the company in this scenario.
Solution:
Desicion variables

Chairs Desks Tables

Quantity 48 120 72

Objective
Chairs Desks Tables
Total profit $ 16 $ 20 $ 14 $ 4,176.00