Identity and discuss the drivers of corporate value, (those described in the course material) for Alibaba Group Holding Ltd (Hong Kong stock code: 9988). Use the market value added (MVA) approach to quantify the creation and/or destruction of value from 2nd March 2020 to 11 September 2020.
Note: Question 1’s word count requirement is between 1,000 and 1,200 words. Students are to provide the word count on the first page of the report. References: minimum of 5. There should be a brief introduction, the body of the answer, and a conclusion section. Students are expected to write clearly and concisely, with appropriate in-text citations and references provided (Harvard system).
Ezsky plc produces wind turbines and is considering buying supplementary equipment that will decrease manpower needs to produce a unit from 5 manhours to 2 manhours. The main machinery has 3 more periods of useful life. If the supplementary equipment is purchased, the existing (main) machine will not be sold at a scrap value of $10,000.
The production units are estimated depending on the state of the green industry, as follows:
Industry Period 1 Period 2 Period 3
Weak (probability 70%) 2,000 units 3,000 units 2,500 units
Strong (probability 30%) 8,667 units 9,667 units 14,167 units
The employee hourly rate for the coming period is £7.00, rising in period 2 and period 3 to £8.00 and £9.00 respectively.
The supplementary equipment has a capital cost of £300,000 with an estimated residual value at the end of period 3 of £60,000. Capital allowances are at 25% on a reducing balance basis.
The company pays corporation tax at a rate of 30% per period. The authorities will provide a one-off cash grant of $5,000 at the end of the first year.
The company assesses projects of this type using a discount rate of 5% per period.
Any difference between the written down value and proceeds from the sale may be claimed as a tax credit. Taxes are considered one period in arrears.
- Calculate the annual cost savings for periods 1, 2, and 3.
- Calculate the taxable profits for periods 1, 2, and 3.
- Calculate the total cash flows for each period.
- Calculate the expected net present value of the project suggesting whether the company should invest in the supplementary equipment.