Refer to the “Lecture Illustration – 4A-1” as discussed in the “Week-5 Recorded Topic Discussion Session”, calculate the (i) NPV, (ii) IRR, (iii) PVI, (iv) Payback period, (v) Discounted payback period for ALTERNATIVE Investment Proposal-Q if the required rate of return is 10.84 and the annual net cas

Requirements: (Write answers to the following questions in the ‘Ques1’ sheet of the EXCEL TEMPLATE provided for Assignment-2.)

(a) Refer to the “Lecture Illustration – 4A-1” as discussed in the “Week-5 Recorded Topic Discussion Session”, calculate the (i) NPV, (ii) IRR, (iii) PVI, (iv) Payback period, (v) Discounted payback period for ALTERNATIVE Investment Proposal-Q if the required rate of return is 10.84 and the annual net cash flows of Proposal Q are: Year-0  ($300m); Year-1 $84m; Year-2 $108m; Year-3 $147m and Year-4 $167m.

(b) Calculate the crossover rate (between proposals P and Q) based on changed cash flow data mentioned in the requirement-a above. Show the range of required rates for which either proposal-P or proposal-Q would be preferred.

(c) Based on your findings in requirements a and b above, what would be the decision of selection of proposal (when the required rate of return is 10.84 percent)?

(d) Refer to the “Lecture Illustration – 4B-2” as discussed in the “Week-6 Recorded Topic Discussion Session”, calculate the tax implication in the third year relating to the sale of the equipment if the depreciation rate is 24% straight line and the purchase price (of the equipment) is $39,430.

(e) Refer to the “Lecture Illustration – 4B-4”, prepare a new cash flow table (in the “CF-4B-4” sheet of the Excel Template provided and calculate the NPV, IRR, PVI and discounted payback period after incorporating the following changes (other information will remain the same as provided in the illustration):

  • The installation cost for the juice producing machine would be $6,000 and the transportation cost of $7,000 would be paid by the supplier. The machine will have an economic life of six years and would be depreciated at 14 percent straight line for the tax purpose.
  • Sales are expected to grow at 21% in each year until the 6th year. Costs have been estimated to be 47 percent of sales revenue. In addition, there would be an annual fixed overhead cost of $6,996.
  • Annual sales of the company’s cookies will increase by $10,000 in the first year and that increased sales will further grow by 13 percent in each year until the 6th year.
  • Applicable corporate tax rate would be 35 percent.
  • The cost of capital is estimated to be either 10.91 percent or 17 percent. The management has targeted a discounted payback period of 2 years.

What would be your decision about this project at 10.91 and 17 percent costs of capital?

What would be your comment in recommending this project if you discover that this machine has options to produce a range of variety of juices that are not 100% natural. Your further investigation reveals that all data provided for this project is based on the production of juice using multiple concentrated ingredients not considered healthy choices.

INSTRUCTIONS

Downloading Excel File Template for Assignment-2

  1. Open “Assignment-2: EXCEL TEMPLATE” (Under “Assignments” on Canvas site of the unit)
  2. Download the Excel File Template
  3. Save the file in your device using the File Name: “FM Assignment 2_Your ID”
  4. You have to work on this Excel File and finally submit it via the Turnitin submission link provided on Canvas by the due date (6 May 23:59 AEST)

Preparing your answers and formal report for final submission

  1. Follow the instructions provided in the Excel File for calculating and writing your answers.
  2. In a Word doc file, write a formal report of 5 pages (A4 size, normal margin, Times New Roman font size 12) with the following details and headings:

       Cover page: Write ONLY Unit CodeUnit TitleAssignment-2Your Full NameID

Executive Summary: On Page-2

Table of Content: On Page-3

Report of 5 pages (Pages 4-8): Include headings – (i) Introduction, (ii) Explanation of decision relating to Proposals P and Q (requirements a, b, and c); (iii) Explanation of decision relating to the juice producing machine when the cost of capital is 10.91 percent; (iv) Explanation of decision relating to the juice producing machine when the cost of capital is 17 percent; (v) Explanation of decision relating to the juice producing machine after revealing information from the investigation; (vi) Conclusion.

References (on page-9): Provide the list of all references used in the report. (In-text referencing is required. When you define any term, use appropriate reference within the text)

Appendix: As you find necessary.

 

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