25742 Financial Management
Spring Semester 2025
Capital Budgeting Case Study (Group Assignment)
Premium Smash Repair
Premium Smash Repairs Pty Ltd (PSR) is a smash repair business located in the western suburbs of
Sydney. The business was started by Ben Martin in the late 1960’s but is now run by David and
Tom Martin, the two sons of founders of the business. David and Tom each own 30% of the issued
ordinary shares in the company but several other family members also own shares and the company
is expected to perform well and pay annual dividends. The company’s Board of Directors consists of
David, who is Managing Director, Tom, their sister Jenny and their cousin Anna who is the company
secretary. There is one independent director and he is Joel Ellis a family friend and the family tax
accountant. The company chairman is their Uncle, Chris Martin who was the other founder of the
company. Anna works in the business as the Accountant/Office Manager and has recently completed
an MBA at UTS.
The smash repair business has been through some turbulent times in recent years mainly due to the
increasing dominance and control exerted by the major insurance companies. PSR has survived and
managed to remain profitable through the reorganisation of the industry and is a registered repairer for
the major insurance companies and this ensures a steady stream of insurance work. On top of this Tom
has built up a good reputation with two historic car clubs that has resulted in restoration work on
vintage cars that has proved profitable and interesting work.
The company operates from premises that it has owned since the business was incorporated. At the
time of incorporation it was decided to purchase two adjoining blocks of land and construct the
workshop, spray booth and office on one block and keep the other as an investment or for future
expansion. During the years the buildings have been renovated and updated several times with the
last occasion being only 15 months ago when a new spray booth was constructed. The workshop etc
is still contained on one block. The other block is still vacant, not very securely fenced and has to be
maintained by one of the local lawn mowing contractors to keep the grass and shrubs tidy. This
maintenance currently costs $19,000 p.a. and is expected to increase by 3% p.a. for the next ten
years. This expense will be eliminated if the site is developed. For some time now Jenny and Anna
have been advocating selling the land as it would release a significant amount of money which could
be paid out to shareholders as a special dividend. However Chris has always had a dream that the land
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would be used to expand the business and is not keen to sell. The company is working at full capacity
five days a week and Saturday overtime is not unusual. Some historical car work had to be declined
recently. The major bottleneck is the spray booth where cars have to remain for a minimum drying
period. The company has two spray booths but one can only be used for parts not full bodies. The
company also had a problem with the parking of vehicles during the day and could only use the spare
ground for parking during dry weather. In wet weather shuffling cars was not only frustrating but an
inefficient use of staff time.
Some months ago Chris had asked David and Tom to investigate the feasibility of expanding the
business and Tom has just completed an overseas trip (a combination of work and holiday with his
wife and family) during which he completed some research into the latest techniques used in the smash
repair business in Europe. He had also studied the latest spray booth technology and had been very
impressed by a new German spray booth. The trip had been very expensive and it had cost
$39,900 for airfares, accommodation and meals. As most of the trip was business the company has
paid for this expense. On returning from the trip Tom met with Chris, David and Anna to outline an
idea that he had been considering for some time.
Tom stated at the meeting that he believed that if the company added a new spray booth and workshop
at the back of the vacant block he would be able to significantly increase business particularly in the
restoration of vintage and historical cars. Car clubs were growing and keeping the cars in pristine
condition was important to the enthusiasts in these clubs. PSR had built up a solid reputation for high
quality work in this area and this work provided far bigger margins than insurance work. He firmly
believed that PSR would also be able to take on more insurance work with the increased spraying
capacity. Tom tabled a projected revenue forecast for both the historical car business and increased
insurance work. The forecast revenue is detailed in Appendix 1. He also outlined some preliminary
estimates on the costs involved. The building to house the spray booth and workshop would cost about
$238,000 to erect. The building would be constructed on the back half of the block and the front half
of the block would be converted to an all-weather car park for cars awaiting repair and customer and
staff parking which would improve efficiency. The costs of the car park construction are estimated to
be $77,000. The biggest cost would be the spray booth and the associated equipment. He had a firm
quote from the German company and the total cost including all shipping, installation and testing would
be $354,000.
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Chris was very excited and said this was just what he had anticipated and would like to see the company
at least double its size before he finally stood down as Chairman of the company. Both Anna and David
were less enthusiastic. Anna argued that the company was profitable and provided a good return to
the family particularly those that work in the company. A larger company would only bring more
problems and Tom had not considered the extra staff that would be needed to work in the new premises.
The land was very valuable and a local company had recently offered $323,000 for the block. Anna
firmly believed that the company should take the money and carry on the business at current levels of
activity. At this Chris got angry and stated that the land had only cost the equivalent of $9,000 which
is next to nothing and was bought for the company to expand. He stated selling the land is not to be
considered and the market value is not relevant.
David was more restrained and stated his concern was the level of investment required and raising the
cash. The company certainly did not have any spare cash. The company had borrowed the
amount required for the last renovations and were still making payments on the term loan from the
bank. In the current climate he was concerned that additional finance of that magnitude would be
difficult to obtain from the bank. He felt that a proper business plan should be produced and a short
report prepared for all board members and the full Board should make the final decision. David
emphasized that Tom and Anna should work as a team and assemble all the data required to make the
decision and meet in about a month to agree on the base data to be included in the analysis. A summary
of the data presented at the meeting and any relevant discussion is shown below:
1. It was agreed that the sales figures presented by Tom as shown in Appendix 1 would be used
in the analysis. Anna however was concerned that the increased insurance business might not
be achieved because she was not aware of any insurance business that PSR had declined. She
believed that this revenue should be excluded from the analysis but had been overruled by
David. If the insurance business was excluded the increased headcount could be reduced by one
from year 2 onwards and material costs and general consumables would decrease accordingly.
2. The quote for the German machine had been confirmed in writing but they had also included an
offer to train key staff to use the new technology which would cost $37,500 which PSR would
take up. This would occur prior to the commencement of commercial operations and would
involve a supervisor travelling to England. The tax office had confirmed that the $37,500 would
be a tax deduction at the time the amount was paid although Anna said the company
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did have the opportunity of spreading this cost and about 20% of the cost of Tom’s overseas trip
over ten years for accounting purposes.
3. The number of employees would be increased. At the start of the new business a new supervisor
would be required for the new area. One of the current employees will be promoted. The
increase in wages cost of his promotion including all on-costs will be $19,000.
p.a. His current position in the current building would have to be replaced at a total cost per
annum of $71,000. Details of the other agreed increases in wages are shown in Appendix 1. It
was also agreed that an allowance would be made in the analysis for all wages to increase by
3% p.a.
4. There was no additional information available on building costs and it had been agreed that a
5% contingency be included on both the building and car park. Increased building maintenance
costs are shown in Appendix 1.
5. The parts and material costs for the new business have been estimated as a percentage of
revenue. The percentage for insurance work is 45% and for the historical car work is 20%.
The costs of all general consumables i.e. paint, nuts, bolts cleaning rags etc. are shown in
Appendix 1.
6. David has told Tom that there are old tools and equipment held in the current warehouse that
could be used in the new building. Although several years old they are fully depreciated and the
new project could have them at no cost. The tools had recently been appraised for insurance
purposes and had a market value of $18,000.
7. Anna has analyzed the cash flow and the company would have to borrow $930,000 to finance
the project. The bank has given preliminary approval but want to see a final business plan. The
interest rate would be 8.45% p.a. and the loan will be repayable over 7 years with a monthly
repayment figure of $9,970.
8. The company pays tax at a corporate tax rate of 30%.
9. Joel Ellis has stated that a return of 14.5% on an investment of this type is appropriate.
10. Land is not depreciable and no capital gains tax will apply. In ten years, it is estimated that the
land could be sold for about $472,000. The tax office has determined that the buildings and car
park can be depreciated at 8% straight line based on cost and the spray booth can also be
depreciated at 20% straight line.
11. David has asked that the project be analyzed over ten years as it is very uncertain if the business
will continue after that date.
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12. In ten years, the old tools will have no value and the spray booth would only have a scrap
value of $23,000. The buildings and car park will not add to the land value at the time of sale
and can be considered to have no value in ten years’ time.
13. There would be an increase in inventory of common spare parts at the start of the project with
a value of $28,900.
Your task:
As a friend of Anna, you have been asked to assist her preparing a capital budgeting analysis
report for David and the family that includes an executive summary. The report must contain:
1. An executive summary containing your recommendation to accept or reject the project
and your financial analysis and reasons for the recommendation and any other factors
Anna should consider other than your spreadsheet answer. The report must address
Alice’s concerns regarding the insurance business. The report should be a maximum of
one A4 pages (Single space 12 font). (10 marks)
2. A spreadsheet of cash flow analysis clearly showing the NPV of the project and all
relevant cash flows, the appropriate discount rate and calculations that are used to
support your decision. A well-presented, readable spreadsheet should show a
breakdown (and the total) for the following parts: (15 marks)
i. The cash flows at the start.
ii. The cash flows over the life.
iii. The cash flows at the end.
iv. The NPV of the project.
3. There may be some uncertainty associated with the forecast of insurance business. Anna
asks you to perform a sensitivity analysis for the impact on the NPV estimation due to
such forecast uncertainty. (6 marks)
4. Anna is concerned about the “black box” approach to the NPV evaluation. She would
like you to highlight any risk and other pivotal factors you deem relevant that should be
considered for the decision in the Summary report. (4 marks)
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APPENDIX 1
Premium Smash Repairs
Revenue Forecast $
Year 1 Year 2 Year 3 Year 4 Year 5
Historic Cars 596,000 653,000 724,000 745,800 764,900
Insurance 89,000 165,000 243,000 247,300 255,616
From year 5 onwards total revenue will only increase in line with the expected rate of 3% p.a.
Wages Forecast $
Year 1 Year 2 Year 3 Year 4 Year 5
Number of New
Employees
2 3 4 4 4
Wages Cost 133,000 187,600 255,690 263,361 271,262
Note: The above figures exclude the increased cost of the supervisor and the new employee in the old
building. Wages costs are expected to increase by 3% p.a. from year 5 onwards
Costs Forecast $
Year 1 Year 2 Year 3 Year 4 Year 5
Materials Historic Cars 119,200 130,600 144,800 149,160 152,980
Materials Insurance 40,050 74,250 109,350 111,285 115,027
Building Maintenance 8,000 8,200 15,700 16,171 16,656
General Consumables 68,500 81,800 96,700 99,310 102,052
Note: All the costs shown above are expected to increase by 3% from year 5 onwards