Maxine Glogau

Candidate Number: ddx819

Business and Management Internal Assessment

‘Should Tobaj Ltd invest in repairing or replacing a new roof for the
Liquip Sales Ltd tenanted building?’

Prepared By: Maxine Glogau

Main Essay: 1,999 Words

Executive Summary: 197 Words
Research Proposal: 254
Candidate Number: ddx819
School: Queen Margaret College
School Number: 003740

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 Maxine Glogau
Candidate Number: ddx819

Research Proposal

Research Question:
Should Tobaj Ltd invest in repairing or replacing a new roof for the Liquip tenated
building?
Rationale:
Tobaj Ltd a Qualifying Company has invested in an industrial building tenanted by
an engineering company called Liquip Sales Ltd, which is located in Petone, Lower
Hutt, Wellington, New Zealand. Tobaj Ltd is run and owned by two directors;
Trevor Glogau and Craig Allnatt who are both 50% shareholders. An opportunity
exits whereby Tobaj Ltd should consider whether to repair or replace the existing
roof on the building. Tobaj Ltd will need to compare the cost and time frame of the
two options.
Theoretical Framework:
I plan to analyse both financial and non-financial considerations in my evaluation
for management. Focusing on utilising the financial techniques of Investment
Appraisal, Final Accounts, SWOT, Loan Payback Period, Risk Management and
Decision Trees and preparing a relevant Lewis Force Field analysis.
Key Areas of Syllabus
1.6 Decision Trees
1.8 Lewis Force Field
3.2 Investment Appraisals
3.5 Final Accounts
Methodology
Primary Research:
I will conduct primary research by interviewing one of the directors of Tobaj and
the director of Liquip to establish their opinion on the roof investment. I will need
to contact roofing construction companies and compare quotes for roof repair and
replacement prices.
Secondary Research:
Review a range of secondary sources, both hardcopy and online internet sites
related to financial techniques.
I also plan to examine Tobaj’s annual report and financial reports to determine the
company’s financial position.
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 Maxine Glogau
Candidate Number: ddx819
Problems likely to be encounted and possible solutions:

Possible problems: Solutions:

Difficult to source relevant secondary Use internet to find simple financial

data on financial techniques that are technique explanations.
specific to my ability. Refer back to my IB Business and
Management text book.

Limited perspective as I will only be Acknowledge in advice management.

able to interview the two Tobaj
owners.

Interview questions too broad, I will need to ask a variety of relevant

resulting in unspecific answers. ‘closed’ and ‘open’ questions. While
insuring that they are still appropriate.

Unable to gather a variety of different Acknowledge in conclusion. Discuss

replacement and repair roofing quote. with Tobaj’s owners to assure they are
comfortable with hiring the suggested
construction company.

Action plan/Research timeline:

Dates: Activities: Modifications:

December 2010 Conduct initial research.

Collect several repair and

replacement roof quotes.

January 2011 Topic and question

selection.

Week 2, Term 1 2011 Write initial research Topic question was

proposal slightly modified.

Week 3, Term 1 2011 Review research

proposal

Week 4, Term 1 2011 Draft research proposal

due

Week 5, Term 1 2011 Review and finalise

research proposal.

Week 6-7, Term 1 2011 Conduct interview with

Craig Allnatt and Trevor
Glogau.

Week 8, Term 1 2011 Final research proposal

due

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 Maxine Glogau
Candidate Number: ddx819
Week 9, Term 1 2011 Analyse secondary Started to write
resources i.e. introduction and method.
textbook/internet.

TERM 1 HOLIDAYS Write first draft –

including the
introduction, method,
analysis, conclusion,
recommendation and
appendices.

Week 1, Term 2 2011 First draft of report due Edited and refined
report.

Week 7, Term 2 2011 Final draft due –

including the
introduction, method,
analysis, conclusion,
recommendation,
appendices, executive
summary, bibliography,
title page, contents page,
acknowledgements and
the updated version of
research proposal.

Week 8, Term 2 2011 Teacher consultation

Week 9, Term 2 2011 Refine draft

End of Term 2 2011 Final report due

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 Maxine Glogau
Candidate Number: ddx819
Acknowledgements

I would like to acknowledge and thank:

• Craig Allnatt – Shareholder of Tobaj – for his time and information provided
for my interview
• Trevor Glogau – Shareholder of Tobaj and Owner of Liquip - For allowing
access to Annual Reports and information required.

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Candidate Number: ddx819
Contents Page

1. Introduction Page 9

2. Procedure and Method Page 10

3. Main Results and Findings Page 11

3.1 Roof repair and painting costs Page 11

3.2 Roof replacement costs Page 11

3.3 Leasing contract Page 11

3.4 Tobaj’s recent statement of financial performance

- Profit and Loss statement Page 12

- Balance sheet statement Page 13

3.5 Final Accounts

- Depreciation on repairing and painting the roof Page 14

- Depreciation on replacing the roof Page 15

3.6 Risk Management Page 16

3.7 SWOT analysis Page 16

4. Analysis and Discussion Page 17

Non-financial analysis

4.1 Depreciation analysis Page 17

4.2 Risk management analysis Page 17

4.3 Lewin’s force field Page 17

- Lewin’s Force Field for repairing and painting the roof Page 18
- Lewin’s Force Field for replacing the roof Page 18, 19

Financial analysis

4.4 Decision Tree Page 20

4.5 Investment appraisal Page 21

4.6 Loan payback period Page 22, 23

4.7 Loan capital analysis Page 24

5. Conclusion and Recommendations Page 25, 26

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Candidate Number: ddx819
7. Bibliography Page 27, 28

7. Appendices Page 29

7.1 Tobaj’s 2010 Depreciation Schedule Page 29

7.2 Tobaj’s 2010 Schedule of Financial Leases Page 30

7.3 Interview Transcrip with Craig Allnatt Page 31, 32

7.4 Risk Management Page 32

7.5 Risk Management Anaylsis Page 32

7.6 Roof repair and painting quote Page 33

7.7 Roof replacement quote Page 33

7.8 Background on building Tenants – Liquip Sales Page 33

7.9 Tobaj’s 2010 Introduced Funds Page 34

7.10 Tobaj’s 2010 Financial Leases and Term Loans Page 34

7.11 Article on the newly renovated Liquip building Page 35

7.12 SWOT Analysis Page 36

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 Maxine Glogau
Candidate Number: ddx819
Executive Summary

Shareholders of Tobaj expressed concern in regard to roofing replacement, as the

current roof is rusting and may begin to leak. Therefore this report will analyse the
question: ‘Should Tobaj invest in repairing or replacing the roof of the Liquip
building?’

To begin the research proposal highlights the rationale, theoretical framework and
methodology used for gathering information, as well as possible constraints in
addressing the question. The introduction outlines background information about
Tobaj related to the issue under investigation.

Main results and findings and an analysis were established through an interview
with Craig Allnatt, primary sources, and secondary research that allowed analysis
using financial and non-financial techniques (SWOT analysis, Lewin’s Force Field,
Risk Analysis, Decision Tree, Investment appraisal, and a Depreciation Analysis).

The two roofing investment options were discussed in the conclusion, which
recommends that repairing the roof temporarily would be beneficial for Tobaj at
present due to their negative equity. This was indicated by a lower loan payback
period for roof repair and was highlighted in the discount cash flow.

Finally, further research into other roofing replacement quotes must be

investigated. The report concludes with further unanswered questions and details
areas of further research.

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 Maxine Glogau
Candidate Number: ddx819
1. Introduction

Tobaj is a private Qualifying Company, established 2005 by two shareholders

Trevor Glogau and Craig Allnatt. 1 In 2009 Tobaj invested in an industrial building
tenanted by an engineering company called Liquip Sales NZ Ltd.

The building was extensively renovated in 2009 but the roof was not replaced. 2 An
opportunity exists for Tobaj to consider a major area of capital expenditure;
repairing or replacing a new roof. Currently the roof is rusting and is beginning to
leak. 3

Tobaj will need to analyse both financial and non-financial considerations,

comparing the cost and time frame of the two options. To assist Tobaj in this I will
use financial techniques such as Investment Appraisal, Profit and Loss, Balance
Sheet, Lewin’s Force Field Analysis, Decision Trees, and Risk Management. I will
also analyse potential opportunities and threats by preparing a relevant SWOT
analysis.

Therefore this report will focus on the research question; ‘Should Tobaj Ltd
invest in repairing or replacing a new roof for the Liquip Sales Ltd tenanted
building?’

17.3 – Interview with Craig Allnatt

2Appendix 6.5 – Background on building tenants.
3 3.1 – Roof repair and painting costs

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 Maxine Glogau
Candidate Number: ddx819
2. Procedure and Method

Primary research consised a detailed interview with a shareholder of Tobaj, Craig

Allnat. Through utilising a range of ‘open’ and developed questions, the interview
was focused on the internal and external factors that may influence Tobaj’s
investment decision. This formed relevent opportunities and constraints in
preparation for a Lewin’s Force Field, Decision Tree and a SWOT analysis. Financial
estimations as well as personal views on the advantages and disadvantages of both
investments were gathered. This allowed a range of decision-making techniques
including a Decision Tree and Investment Appraisal to be implemented.

Secondary research was obtained by analysising Tobaj’s financial position through

their 2010 annual report. Information from both hardcopy and online internet
soures relating to financial techniques was reviewed. In combination, this provided
a provision and analysis of valid recommendations and conclusion.

To insure that collected data was reliable I had to review all information
validilating it with a second source of data. Financial data collected was based on
actual and estimated figures which needed to be considered. All primary
information gathered was supported with secondary information.

In terms of gathering information a minor problem was encounted due to changing

investment appraisal techniques. This meant I had to recollect other secondary
sources of information. Furthermore it is important to consider that some financial
data collected was based upon both estimated and actual values,4 which needed
added validation.

4 4.4 Decision Tree

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 Maxine Glogau
Candidate Number: ddx819
3. Main Results and Findings:

3.1 Roof repair and painting costs

Fletcher construction (Fletcher Construction, 2010) analysed and gave a set quote
for the repair and painting costs of the Liquip building roof.

Aquaheat estimated that the cost to fix the roof at $5,490.00 with a variation of
$384.00. In the addition to this painting the roof would cost $27,345.00 with a
possible $1,914.15 variation. 5

3.2 Roof replacement costs

Fletcher construction (Fletcher Construction, 2010) has estimated the cost for new
roof at $75,000.6

3.3 Lease

Regarding the interview, in terms of a roofing investment it is important to

consider that Tobaj has recently signed a 3 plus 3 year leasing contract7 with Liquip
who will tenant the building8.

5 7.6 Roof repair and replacement quote

6 7.7 Roof replacement quote
7 3.7 SWOT analysis
8 7.3 – Interview with Craig Allnatt

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 Maxine Glogau
Candidate Number: ddx819
3.4 Tobaj’s recent statement of financial performance

Profit and Loss Account Statement for Tobaj9:

For the year ended 31st March 2010

The basic equation for the Profit and Loss account is10:

ܲ‫ ݎ݁ݒ݋݊ݎݑܶ = ݐ݂݅݋ݎ‬− ‫( ݏ݁ݏ݊݁݌ݔܧ‬Andams, 1989 )

2010 ($) 2009 ($)

REVENUE
Interest Received 7 29
Rent Received 85,333 29,333
Total Income 85,340 29,362

Less Expenses
Accountancy Fees 1,225 700
Bank Charges 733 38,534
Commissions 1
Insurance 6,008 3,318
Interest - Overdraft 2,938
Interest 85,384 63,272
Legal Expenses 10,815 3,634
Rates & Levies 16,006 6,284
Valuation Fees 909
Total Expenses 124,017 116,743
Net Deficit Before Depreciation (38,677) (86,381)

Less Depreciation
Depreciation as per Schedule 32,126 8,747
Depreciation Recovered (240)
Net Depreciation Adjustment 32,126 8,507

SURPLUS/(DEFLICT) BEFORE CAPITAL PROFIT (70,803) (94,888)

Capital profit on Asset Reali (93,888)

OPERATING SURPLUS/(DEFICT) (70,803) (188,776)

NET SURPLUS/(DEFICIT) ($70,803) ($188,776)

EQUITY AT START OF PERIOD (228,631) (39,885)

EQUITY AT END OF PERIOD ($299,434) ($228,631)

9 The Profit and Loss account is the accumulated sum of retained profits for the
current and previous years. It is equal to the amount carried forward in the Profit
and Loss account.
10 Figures gathered from Tobaj’s 2010 Annual Report

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 Maxine Glogau
Candidate Number: ddx819
Balance Sheet Statement for Tobaj:
As at 31st March 2010

The Profit and Loss account will also be shown in the Balance Sheet11 as an
addition to the owners’ equity.12 The basic equation for the balance sheet is:

‫ ݏ݁݅ݐ݈ܾ݅݅ܽ݅ܮ = ݏݐ݁ݏݏܣ‬+ ‫( ݏ݁ݒݎ݁ݏܴ݁ ݀݊ܽ ݈ܽݐ݅݌ܽܥ‬Andams, 1989 )

2010 ($) 2009 ($)

CURRENT ASSETS
National Bank 907
GST Refund Due 33,799 58,098
Taxation 11
Total Current Assets 34,706 58,109

NON-CURRENT ASSETS
Fixed Assets as per Schedule 1,564,232 1,109,912
TOTAL ASSETS 1,598,938 1,168,021

CURRENT LIABILITIES
National Bank 61,736
Accounts Payable 2,558
Shareholders' Current Accounts 6,000 6,000
Total Current Liabilities 8,558 67,736

NON-CURRENT LIABILITIES
Term Loans as per Schedule 1,889,814 1,328,916
TOTAL LIABILITIES 1,898,372 1,396,652
NET ASSETS ($299,434) ($228,631)

Presented by;
EQUITY
Share Capital
Reserves
Retained Earnings (299,434) (228,631)
TOTAL EQUITY ($299,434) ($228,631)

11Figures gathered from Tobaj’s 2010 Annual Report

12The purpose of a Balance Sheet is to present the financial position of an
accounting entity at a certain point in time, which is typically the end of the
accounting period (Janek Ratnatuga, 1993).
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 Maxine Glogau
Candidate Number: ddx819
3.5 Final Accounts

Annual depreciation is a reduction in the book value of an asset at a particular rate

per year (Webfinance, 2011). To calculate the depreciation of both roofing
investments I have used the straight-line method. 13

The formula for calculating the straight-line depreciation is:

ܲ‫ܿݎݑ‬ℎܽ‫ݐݏ݋ܥ ݁ݏ‬
‫= ݊݋݅ݐܽ݅ܿ݁ݎ݌݁݀ ݈ܽݑ݊݊ܣ‬
‫݊ܽ݌ݏ݂݁݅ܮ‬

Calculating the depreciation for repairing and painting the roof14.

$32,835.00
‫= ݊݋݅ݐܽ݅ܿ݁ݎ݌݁݀ ݈ܽݑ݊݊ܣ‬
4 ‫ݏݎܽ݁ݕ‬

‫ = ݊݋݅ݐܽ݅ܿ݁ݎ݌݁݀ ݈ܽݑ݊݊ܣ‬$8,208.7515

Straight-line depreciation for repairing and replacing the roof at $8,208.75 per
annum:

Year end Depreciation ($) Book Value ($)

0 - $32,835.00
1 $8,208.75 $24,626.25
2 $8,208.75 $16,417.50
3 $8,208.75 $8,208.75
4 $8,208.75 0

Graph showing the straight-line

depreciation for repairing and replacing
the roof at $8,208.75 per annum
40000
30000
Value ($)

20000
10000
0
0 1 2 3 4 5
Year end

This depreciation graph is showing the value of the option after 4 years. As a result
the depreciation on the roof will be complete. Tobaj’s tax liabilities will have been
maximized due to reduced tax payments through the depression of expenses.

13 The straight-line method is calculated by taking the purchase or acquisition price

of an asset subtracted by the salvage value divided by the total productive years the
asset can be reasonably expected to benefit the company (Kennon, 2011).
14 Please note: The calculated depreciation is for comparative purposes for this

analysis only, and is not intended year-end depreciation for taxation.

15 Please note: The residual value was not included in this calculation.

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 Maxine Glogau
Candidate Number: ddx819
Calculating the depreciation for replacing the roof16.
$75,125.00
‫= ݊݋݅ݐܽ݅ܿ݁ݎ݌݁݀ ݈ܽݑ݊݊ܣ‬
15 ‫ݏݎܽ݁ݕ‬

‫ = ݊݋݅ݐܽ݅ܿ݁ݎ݌݁݀ ݈ܽݑ݊݊ܣ‬$5,008.33ሶ17

Straight-line depreciation for replacing the roof at $5,008.32 per annum:

Year end Depreciation ($) Book Value ($)

0 - $75,125.00
1 $5,008.33ሶ $70,116.67
2 $5,008.33ሶ $65,108.32
3 $5,008.33ሶ $60,100.00
4 $5,008.33ሶ $55,091.67
5 $5,008.33ሶ $50,083.32
6 $5,008.33ሶ $45,075.00
7 $5,008.33ሶ $40,066.67
8 $5,008.33ሶ $35,058.32
9 $5,008.33ሶ $30,050.00
10 $5,008.33ሶ $25,041.67
11 $5,008.33ሶ $20.033.32
12 $5,008.33ሶ $15,025.00
13 $5,008.33ሶ $10,016.67
14 $5,008.33ሶ $5,008.33ሶ
15 $5,008.33ሶ $0.00

Graph showing the straight-line

depreciation for replacing the roof at
$5,008.32 per annum
80000
60000
Value ($)

40000
20000
0
0 5 10 15 20
Year end

Similarly, this depreciation graph is showing that at the end of 15 years the
depreciation on the roof will be completed. Tobaj’s tax liabilities will have also
maximised due to reduced tax payments by the depression of expenses, however
over a longer period of time.

16 Please note: The calculated depreciation is for comparative purposes for this
analysis only, and is not intended year-end depreciation for taxation.
17 Please note: The residual value was not included in this calculation.

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 Maxine Glogau
Candidate Number: ddx819
3.7 SWOT analysis

A method to illustrate the balance between risks and opportunities is known as a

‘SWOT’ chart, delineating a company’s strengths, weaknesses, opportunities, and
threats18. (Abrams, 2000)

The SWOT Diagram is located in Appendices 7.12

18Appendix 7.3 Interview - This SWOT analysis was derived from the interview
with Craig Allnatt and from this I will mean able to analyse Tobaj’s current position.
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 Maxine Glogau
Candidate Number: ddx819
4. Analysis and Discussion

To analyse the two possible options requires further evaluation by using a range of
financial and non-financial factors.

Non-financial Analysis

4.1 Depreciation Analysis

Through looking at both depreciation graphs19 it is clear that they both serve the
purpose of securing the Liquip tenants. They will be able to do this by increasing
the building value as a result of a new roof, and will also increase Tobaj’s equity
and allow them to be able to pay back the loan more efficiently. However they will
need to also undergo a risk management analysis to insure they are aware of what
risks the organization is upholding before investing in either options20.

4.3 Lewin’s Force Field:

The Lewin’s Force Field will analyse the drivers and restraints for Tobaj in terms of
either replacing or repairing the roof.21 This analysis will identify which investment
is more likely to succeed. 22 By investigating how the driving forces can be
strengthened and how the restraining forces can be decreased will help to improve
the investement’s chance of success23.

19 3.5 Final accounts – Depreciation Analysis

20 Appendix 7.5 – Risk Management Analysis
21 .21 Kurt Lewin wrote "An issue is held in balance by the interaction of two

opposing sets of forces - those seeking to promote change (driving forces) and
those attempting to maintain the status quo (restraining forces)" (Mark Connelly,
2011).
22 3.7 Considered SWOT analysis
23 Forces have been derived from 7.3 interview with Craig Allnatt

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 Maxine Glogau
Candidate Number: ddx819
Lewin’s Force Field for repairing and painting the roof:
The forces for and against change will be allocated a weight from one to five depending on the
strength of the force.

Driving Forces: Restraining Forces:

(Forces for change) Change: (Forces against change)

4 - Rusting Repairing and 5 - Temporary – short term

painting the roof
This diagram indicates
that there is a stronger
driving force (12) for
investing in repairing and
5 - Leaking – Internal painting the roof.
2 - Distrups Liquip Tenants
damage However, there is an
almost equal force (11)
preventing this
investment mainly due to
3 - Less expensive than the fact that repairing 4 - Quality and appearance
replacing and painitng the roof is a
short term investment of
approximately four years
and is not of as high
quality and appearance
as replacing the roof.
Total: 12 Total: 11

Lewin’s Force Field for replacing the roof:

Driving Forces: Restraining Forces:

(Forces for change) (Forces against change)

4 - Rusting 2 – Longer process

Change:
Replacing the roof
Through assessing this
diagram there is a clear
5 - Leaking – Internal indication that there is a 2 - Distrups Liquip Tenants
stronger need and force
damage towards investing in a
new roof (14). The
leaking and rusting in the
roof is resulting in a
5 – Long term strong force for change in 4 – More expensive
either replacing or
repairing the roof.
However as replacing the
roof is long term and will
last for approximately 15
years compared to 4
years when repairing the
roof increased the force
Total: 14 for change. Having said Total: 8
this, due to the roof being
more expensive meant
that there is still strong
restraining forces against 18
the investment (8).
 Maxine Glogau
Candidate Number: ddx819

Overall, from the Lewin’s Force Field analysis replacing the roof is the favored investment
as there is a more significant difference (of six) between the driving and restraining forces
supporting the investment in replacing the roof. There is still a high force for a change
towards investing in repairingng and painting the roof, although the total for the
restraining forces is a factor of 3 higher than for replacing the roof. It is however important
to consider that the weights of these forces are only subjective.

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 Maxine Glogau
Candidate Number: ddx819
Financial Analysis

4.4 Decision tree

A decision tree represents the different investment options that are available to a
business, showing the probable outcomes through a tree diagram. 24 The decision
tree depicts the possible outcomes of an investment’s value. 25 (Knowledge
Exchange, 1997).

Key:

Decision Node: Decision points shown as squares (Hoang, 2009)

Chance Node: Different possible outcomes of a decision (Hoang, 2009)

Option
0.2
$35,133.15
$7,026.63
A 0.7
$32,835.00
$22,984.50
Repair and paint 0.1
$30,536.85
$3,053.69
the roof
= $33,064.82

Roofing
Investment
Options

Replace the roof

0.1
$77,125.00
$7,712.50
Option 0.8
$75,125.00
$60,100.00
B
0.1
$73,125.00
$7,312.50

= $75,125.00
Calculations:
Repair and replace the roof:
(0.2 x $35,133.15) + (0.7 x $32,835.00) + (0.1 x $30,536.85) = $33,064.82
Replace the roof:
(0.1 x $77,125.00) + (0.8 x $75,125.00) + (0.1 x $73,125.00) = $75,125.00

This decision tree has calculated the expected value of each investment. The
expected value for the replacement roof investment is higher by $42,060.18,
however as a quote has been performed for replacing the roof the quoted value is
almost certain. The repair and painting investment option is significantly lower,
however the expected value is slightly higher than its given quote due to painting
and material costs not being fixed. On the whole, an accurate investment cost the
for repairing and painting the roof would be $33,064.82.

24 Note: All decision tree figures are estimates based upon Craig Allnatt’s interview
where he stated how accurately he thought the given quotes were. (Appendix 7.3)
25 ‘Management decisions appear in squares and the uncertainites appear in circles.

Lines show the sequence of choices and results. A probablitly is assigned to each of
the possible outcomes when more than one exists’ (Knowledge Exchange, 1997).
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 Maxine Glogau
Candidate Number: ddx819
4.5 Investment Appraisal

Discounted Cash Flow is a technique used to estimate the value of an investment in

today's money by adjusting future returns to get their present value (NI Direct,
2010)

The current New Zealand interest rate is 2.5% (Trading Economics, 2011)

Discounted cash flow for repairing and painting the roof:

The cumulative interest rate for 2.5% for 4 years:

= (1.025)4
ଵ
=
ଵ.ଵ଴ଷ଼ଵଶ଼ଽଵ
= 0.9060 (4dp)

Therefore the present value of $32,835.00 in 4 years time will be:

$32,835.00 x 0.9060
= $29,746.90 (2dp)

Discounted cash flow for replacing the roof:

The cumulative interest rate for 2.5% for 4 years:

= (1.025)4
ଵ
= ଵ.ଵ଴ଷ଼ଵଶ଼ଽଵ
= 0.9060 (4dp)

Therefore the present value of $75,125.00 in 4 years time will be:

$75,125.00 x 0.9060
= $68,063.25 (2dp)

Calculations:

By calculating the discounted factor it is indicating that in 4 years time the value of
the investment will decrease by $3,088.10 from the current value. The discount
factor calculation is indicating that the present value of today’s investment is
estimated to be $7,061.75 less than today’s value.

These figures are signifying that if Tobaj decides to repair the roof temporarily for
4 years, the present value of a roof replacement investment will not decrease
significantly enough to affect the firm’s net cash flow. As a result in order to
maintain a high value of Tobaj’s future net cash flow it is important that Tobaj
decides on an appropriate investment immediately.

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 Maxine Glogau
Candidate Number: ddx819
4.6 Loan Payback Period:
Repairing or replacing the roof will not give Tobaj any profitable return, it will
however allow the continuity of the Tobaj company by retaining the Liquip tenants
and rental income. To calculate the payback period for the roofing investment I will
not be able to include the annual net cash inflow nor the incremental annual net
cash inflow26. Hence I will need to predict the cash inflow needed per year to pay
off the investment. 27. Tobaj will also need to investigate risk management to
ensure that undersirable events such as bankruptcy are prevented from occuring.28
A payback period will be performed to see whether the loan should be paid in off in
three or five years at a 9% interest rate.

ܲܽ‫ ݊ܽ݋݈ ݎ݋݂ ݀݋݅ݎ݁݌ ܾ݇ܿܽݕ‬ሺ݊‫݁ݐܽݎ ݐݏ݁ݎ݁ݐ݊݅ ݃݊݅݀ݑ݈ܿ݊݅ ݐ݋‬ሻ =

‫ݐ݊݁݉ݐݏ݁ݒ݊ܫ‬
‫ ݀݋݅ݎ݁݌ ݁݉݅ݐ ݀݁ݐܽ݉݅ݐݏܧ‬ሺ݅݊ ݉‫ݐ݊݋‬ℎ‫ݏ‬ሻ

‫ܿ ݁ݐܽݎ ݐݏ݁ݎ݁ݐ݊ܫ‬ℎܽ‫= ݁݃ݎ‬

‫ݐ݊݁݉ݐݏ݁ݒ݊ܫ‬
× ݅݊‫݁ݐܽݎ ݐݏ݁ݎ݁ݐ‬
‫ ݀݋݅ݎ݁݌ ݁݉݅ݐ ݀݁ݐܽ݉݅ݐݏܧ‬ሺ݅݊ ݉‫ݐ݊݋‬ℎ‫ݏ‬ሻ

ܲܽ‫= ݊ܽ݋݈ ݎ݋݂ ݀݋݅ݎ݁݌ ܾ݇ܿܽݕ‬

‫ݐ݊݁݉ݐݏ݁ݒ݊ܫ‬
+ ‫ܿ ݁ݐܽݎ ݐݏ݁ݎ݁ݐ݊ܫ‬ℎܽ‫݁݃ݎ‬
‫ ݀݋݅ݎ݁݌ ݁݉݅ݐ ݀݁ݐܽ݉݅ݐݏܧ‬ሺ݅݊ ݉‫ݐ݊݋‬ℎ‫ݏ‬ሻ

Payback period for the loan at an estimate of three years for repairing and painting
the roof:

ܲܽ‫ݐ݊݋݉ ܾ݇ܿܽݕ‬ℎ݈‫ ݎ݋݂ ݕ‬3 ‫ ݏݎܽ݁ݕ‬ሺ݁‫ݐ ݃݊݅݀ݑ݈ܿݔ‬ℎ݁ ݅݊‫ܿ ݐݏ݁ݎ݁ݐ‬ℎܽ‫݁݃ݎ‬ሻ:

=$912.08 (2dp)

Payback monthly for 3 years including the interest charge of 9%:

$912.08 x 0.09
=$82.09
$912.08 + $82.09
= $994.17

Total payback monthly for 3 years for repairing and painting the roof:
$82.09 x 36
= $2,955.14
$2,955.14 + 32,835.00
=$35,790.15

26 Appendix 7.3 - A solvency test was applied on Tobaj and they successfully passed
allowing them to receive a loan.
27 Appendix 7.3 Tobaj currently has insufficient reserves, hence they will need to

obtain a loan from a commercial lender. Tobaj has received a quote from the ANZ
National Bank for both roofing options for a three or five year period with an
interest rate of 9% paid monthly.
28 Appendix 7.4 – Risk Management Analysis

22
 Maxine Glogau
Candidate Number: ddx819
Payback period for the loan at an estimate of five years for repairing and painting
the roof:
ܲܽ‫ݐ݊݋݉ ܾ݇ܿܽݕ‬ℎ݈‫ ݎ݋݂ ݕ‬5 ‫ ݏݎܽ݁ݕ‬ሺ݁‫ݐ ݃݊݅݀ݑ݈ܿݔ‬ℎ݁ ݅݊‫ܿ ݐݏ݁ݎ݁ݐ‬ℎܽ‫݁݃ݎ‬ሻ:
=$547.25 (2dp)

Payback monthly for 5 years including the interest charge of 9%:

$547.25 x 0.09
=$49.25 (2dp)
=$547.25 + $49.25
= $596.50

Total payback monthly for 5 years for repairing and painting the roof:
$49.25 x 60
= $2,955.15
$2,955.15 + 32,835.00
=$35,790.15

Payback period for the loan at an estimate of three years for replacing the roof:
ܲܽ‫ݐ݊݋݉ ܾ݇ܿܽݕ‬ℎ݈‫ ݎ݋݂ ݕ‬3 ‫ ݏݎܽ݁ݕ‬ሺ݁‫ݐ ݃݊݅݀ݑ݈ܿݔ‬ℎ݁ ݅݊‫ܿ ݐݏ݁ݎ݁ݐ‬ℎܽ‫݁݃ݎ‬ሻ:
$75,125.00
36
=$2,086.81 (2dp)

Payback monthly for 3 years including the interest charge of 9%:

$2,086.81x 0.09
=$187.81
=$2,086.81 + $187.81
=$2,274.62

Total payback monthly for 3 years for replacing the roof:

$187.81 x 36
= $6,761.25
$6,761.25 + $75,125.00
=$81,886.25

Payback period for the loan at an estimate of five years for replacing the roof:
ܲܽ‫ݐ݊݋݉ ܾ݇ܿܽݕ‬ℎ݈‫ ݎ݋݂ ݕ‬5 ‫ ݏݎܽ݁ݕ‬ሺ݁‫ݐ ݃݊݅݀ݑ݈ܿݔ‬ℎ݁ ݅݊‫ܿ ݐݏ݁ݎ݁ݐ‬ℎܽ‫݁݃ݎ‬ሻ:
$75,125.00
60
=$1,252.08 (2dp)

Payback monthly for 5 years including the interest charge of 9%:

$1,252.08 x 0.09
=$112.69 (2dp)
=$1,252.08 + $112.69
=$1,364.77

Total payback monthly for 5 years for replacing the roof:

$112.69 x 60
= $6,761.25
$6,761.25 + $75,125.00
=$81,889.25

23
 Maxine Glogau
Candidate Number: ddx819
4.7 Loan Captial Analysis
For the repairing the roof option Tobaj can pay off their $35,790.15 loan at $994.17
per month for three years or $596.50 for a five year time period. Alternatively with
a roof replacement loan it would be possible to pay off the $81,886.25 loan at
$2,274.62 per month for three years or $1,364.77 for a five year time period.

24
 Maxine Glogau
Candidate Number: ddx819

5. Conclusion and Recommendations

Given Tobaj’s negative equity of -$299,434 the company is in a financially

challenging position in terms of investing in replacing or repairing a roof. Thus, it
appears they will need to receive a loan from a bank to pay for either of the
investments. As the roof is leaking it may become a liability to Tobaj if it is not
repaired or replaced immediately. The discount cash flow analysis is indicating that
the present value of the investment will decrease rapidly over the next four years,
however more significantly for the roof replacement investment. Therefore
although Tobaj is currently not in a stable financial position, in order to prevent the
roof from becoming a liability and the present value of their investment decreasing
it suggests that one of the investment should be performed immediately.

The decision tree is indicating that the estimated cost for the roof replacement
investment as notably higher by a probability of $42,060.18. Lewin’s Force Field
Analysis is highlighting that there are stronger driving forces for change towards
investing in a new roof replacement because of the long term and quality aspects of
the investment. When examining the loan payback period the loan for the roof
replacement is considerably higher which will result in a higher payback per month
with a 9% interest charge. Owing to Tobaj’s financial position they will not be able
to receive a loan from the bank for either of the investments without a capital
injection from the two shareholders. As Liquip has signed a new 3 plus 3 lease of
the building there will also be a rental increase. Hence, Tobaj will be able to receive
a loan from the bank for a roof investment depending on a successful capital
injection and rental increase.

The option of investing in a replacement roof does not appear as favourable due to
the high monthly costs involved. Currently, Tobaj presently is in a position
whereby they will be finically able to repair the roof to prevent it becoming a
liability. Consequently as this investment is only temporary and has a predicted
lifespan of four years Tobaj will need to invest in a roof replacement subsequently
when they are more financially stable.

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 Maxine Glogau
Candidate Number: ddx819
Recommendations:

• Invest in repairing and painting a roof. However after 4 years when the
repaired roof will no longer be adequate and reliable, invest in replacing the
roof .
• In terms of paying for the new roof I would suggest obtaining a loan from
the ANZ National Bank with a three year payback period at a 9% interest
rate of $994.17 monthly. This will allow Tobaj to pay off the loan before roof
replacement is needed. In order to pay off the loan a cash injection from
both shareholders will be necessary.
• Increase the rent on the building. This will increase revenue and allow
budgeting for the future roof replacement.
• Although a recent 3 plus 3 year lease has been signed, a future lease for 10
years may be necessary in order to insure that there will be a future rental
increase and therefore maintained income.

My analysis is limited; further investigation of other roofing quotes must be

undertaken to find the lowest cost while still maintaining a high quality. Also
external factors such as the Christchurch earthquake may cause the rates of roof
repair and replacement to rise above the present quoted value. My first interview
was also very limited as I only interviewed one of the Tobaj shareholders. Simiarly
I could have obtained more valuable primary research through interviewing other
staff from Liquip, other than just the owner. Unanswered questions such as; ‘will
Liquip agree to a raise in rent cost?’ leaves Tobaj’s future albility to payoff the roof
repair loan in question.

26
 Maxine Glogau
Candidate Number: ddx819
6. Bibliography

(Jae K. Shine, 1994) (Wright, 1970) (Neale, 2003) (Bull, 2008) (Bickey, 1992)

Websites:

Kennon, J. (2011). About.com. Retrieved May 2011 from Straight-line depreciation:

http://beginnersinvest.about.com/od/incomestatementanalysis/a/straight-line-
depreciation.htm

NI Direct. (2010). Glossary. Retrieved May 2011 from Finance and Personnel:
http://www.dfpni.gov.uk/eag-glossary

Mark Connelly. (2011). Force Field Analysis - Kurt Lewin. Retrieved June 22, 2011
from Change-Management-Coach.com: http://www.change-management-
coach.com/force-field-analysis.html

Trading Economics. (2011, March). New Zealand Interest Rate. Retrieved April 2011
from Trading Economics: http://www.tradingeconomics.com/new-
zealand/interest-rate

Webfinance. (2011). Annual Depreciation. Retrieved May 2011 from Investor

Words.com:
http://www.investorwords.com/8823/annual_depreciation.html#ixzz1Q5OlVVVM

________________________________________________________________________________________________

Liquip's Website:

Liquip Sales. (2011, June). Liquip Sales NZ Limited. Retrieved June 23, 2011 from
About Us: http://www.liquip.co.nz/

________________________________________________________________________________________________

Texts:
Abrams, R. (2000). The Successful Business Plan: Secrets and Strategies. (E. Wait,
Ed.) Canada: Running 'R' Media.

Andams, A. (1989 ). Investment. London, UK: Uraham & Trotman Limited .

Bull, R. (2008). Financial Ratios. Burlington, USA: CIMA Publishing.

Bickey, T. (1992). The Basics of Budgeting. Boston, USA: Crisp Publications Inc.

Fletcher Construction. (2010). Roof Maintenance and Painting. Quote, Wellington.

Hoang, P. (2009). Business and Management. Victoria, Australia: IBID Press.

Jae K. Shine, J. G. (1994). Bugeting Basics and Beyond. USA: Prentice-Hall Inc.

Janek Ratnatuga, C. R. (1993). Principles of Fiancial Decision Making. Queensland,

Australia: John Wiley and Sons.

Knowledge Exchange. (1997). Business Encycloypedia Illustrateed. (L. Spurge, Ed.)

Santa Monica, California, USA: Knowledge Exchange.

27
 Maxine Glogau
Candidate Number: ddx819
Neale, R. P. (2003). Corporate Finance and Investment. Edinburgh, England: Pearson
Education Limited.

Murphy, D. (2008). Understanding Risk. London, UK: Taylor and Francis Group.

Wright, M. (1970). Financial Management 2nd Edition. Berkshire, England:

McGraw-Hill Book Company Limited.

______________________________________________________________________________________________

28
 Maxine Glogau
Candidate Number: ddx819
7. Appendix:

7.1
.1 Tobaj’s 2010 Depreciation Schedule (Liquip Sales, 2011)

29
 Maxine Glogau
Candidate Number: ddx819
7.2 Tobaj’s 2010 Schedule of Financial Leases (Liquip Sales, 2011)

30
 Maxine Glogau
Candidate Number: ddx819
7.3 Interview Transcrip with Craig Allnatt – 50% shareholder of Tobaj

1) Could you please inform me about the history of your company?

Tobaj was established in 2005 as a QC as a vechile to purchase industrial property.

2) What is the investment issue you are facing?

The building that Tobaj owns at 90 Sydney St has a very rusty roof and may begin to
damage newly refurbished offices and warehouse area. The directors need to know
whether it is more economical to repair it and extend its life or to replace it outright.

3) What is wrong with the roof and how will it effect your company?

It is rusting and beginning to leak. It may become a libablity for Tobaj if it damages
the tenants valuable stock.

4) Have you received any roofing quotes?

Yes, I have received a roof repair and replacement cost that I will give to you. These
are the most cost effective quotes.

5) Are you in a financially stable position to terms of a roof investment?

No are currently not in a postiive cash flow position after recently investing heavily in
the refurbishment of the building.

6) What does you leasing contract with Liquip consist of?

We have recently entered a new 3 plus 3 leasing agreement with the existing tenant.
This means that liquip has signed for 3 years plus an extra 3 year right of renewal.

7) Are you as a stakeholder willing to contribute to the roof investment?

We will be willing to pay a cash injection if a loan cannot be secured from the bank.

8) Which bank is Tobaj linked to?

We are linked to ANZ National Bank

9) Have you discussed a loan proposal with the bank?

Tobaj passed a solvencing test which will allow us to be able to get a loan. Tobaj has
received a quote from the ANZ National Bank for both roofing options for a three or
five year period with an interest rate of 9% paid monthly.

10) How long is the lifespan of a roof repair and paint investment?
On the quote it has an estimated 4 year lifespan.

11) What is the lifespan of a replacement roof?

On the quote it has an estimated 15 year lifespan.

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 Maxine Glogau
Candidate Number: ddx819
12) What is the likelihood that the roof replacement investment quote will be
accurate?

I have talked to Fletcher construction and they said that their quote was fairly
accurate, however it could be slightly higher due to unexpected material or labour
costs.

13) What is the likelihood that the roof replacement investment quote will be
accurate?

I believe that the quoted value for the roof replacement investment it will be fairly
accurate as it was estimated specifically on material costs and the duration for how
long it should take.

7.4 Risk Management

Investing in either roof repair or replacement will be a risk for Tobaj due to their
financial position. Tobaj is in negative equity therefore obtaining a loan while still
paying off debt puts them at risk. Risk management is a process to ensure that
undesirable events, such as going into bankruptcy are prevented from occurring.
(Murphy, 2008)

It has been said that good risk management requires:

• An understanding of the risks being taken

• A comprehensive definition of the firm’s risk appetite
• Allowing opportunities to be exploited within the risk appetite
• But ensuring that risks outside it are not taken
(Murphy, 2008)

7.5 Risk management Analysis

There is a risk involved in both roofing investments therefore Tobaj will need to
have a good risk management strategy. 29 They will need to insure that they have
discovered what risks the organization is upholding, such as perhaps the future
inability to pay off the loan for either investments. To prevent this from happening
that will need to look at proposing an extended lease to Liquip for ten years as well
as increasing the rent on the lease. Furthermore, to minimize this risk it is
important that the shareholders pay a cash injection to pay off the first months of
the loan. There is also a risk in both roof investments being of less of quality than
required.
These risks include:
- Possible future inability to pay loan.
- Possible sub standard roof
- Loss of tenant

29 Appendix 7.4 - Risk management

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 Maxine Glogau
Candidate Number: ddx819
7.6 Roof repair and painting quote

(Fletcher Construction, 2010)

This is based on 875 square meters of roof area at $75 per square meter (65,625.00)
plus flashing cost of $9,500.00
Coloursteel has a 15 year warranty.

7.7 Roof replacement quote:

The analysis stated the ‘metal roof generally is in good shape despite large areas of
surface rust’ (Fletcher Construction, 2010).
2010). Some roof troughts have rusted through
at the gutter line and will need to be patched’ (Fletcher Construction, 2010).
2010) It has
been recommended that the ridge flashing should be re-fixed
re fixed and the condition of the
roof cannot be determined until the ridge flashing is removed (Fletcher Construction,
2010).

7.8 Background on building Tenants – Liquip Sales

Liquip Sales (NZ) Ltd was formed in 1986 by Mr Trevor H Glogau (Managing
Director) of Wellington, New Zealand. Now, over 15 years
years later, the company has
grown and branched into specialised areas and industries .

Liquip Sales (NZ) Ltd is a major supplier of equipment for fluid handling
applications, particularly where the storage, transportation and distribution of
hazardous chemicals
icals is concerned. A strong emphasis has always been placed on
the needs of the petrochemical and related industries, while other industrial
sectors also served with a range of specialist pumping and metering equipment.

(Liquip Sales, 2011)

33
 Maxine Glogau
Candidate Number: ddx819
7.9 Tobaj’s 2010 Introduced Funds

7.10 Tobaj’s 2010 Financial Leases and Term Loans

34
 Maxine Glogau
Candidate Number: ddx819
7.11 Article on the newly renovated Liquip building (Liquip Sales, 2011)

35
 Maxine Glogau
Candidate Number: ddx819
7.12 SWOT Analysis

Strengths Weaknesses
• Strong links with building tenants, as • Small establishing company.
shareholders are also owners. • Minimal finance, in negative equity.
• Long term tenant who has been in • The company is currently highly
business for 25 years. leveraged. This means that loan
• Shareholders have a worthy business repayments leave little cash for capital
experience. expenditure items.
• Established relationship with
financiers.
• Recently established 3 plus 3 year
leasing contract with Liquip
• The building is well located with good
car parking.
• The building is well constructed
meeting all the earthquake code
requirements and is in a well
maintained condition other than the
roof.
• Replacing or repairing the roof will
protect the value of Tobaj’s assets.
• Create favourable working conditions
for tenants.
Opportunities Threats
• Will increase the value of the building. • Liquip moving buildings.
• Prevent Liquip locating to another • Leaking roof causing damage on Liquip’s
building. stock – liability.
• However if current tenants do • Banks are becoming increasingly
relocate, will aid finding new tenants. stringent on their lending terms to
commercial and industrial property
investors.

36