Application of capital budgeting techniques

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Reference no: EM133301612

Business and Finance Essentials

Learning outcome 1: Application of capital budgeting techniques under risk and non-risk conditions.

Learning outcome 2: Appreciation of the nature of uncertainty in business decision-making.

Learning outcome 3: Utilization of databases, process data and explain outcomes in an informative way.

Learning outcome 4: Enhance communication skills to present both qualitative and quantitative information, together with analysis, argument, and commentary.

Business Case Study

You are working for DMU Power Systems, a market leader in sustainable energy. DMU Power Systems is a public company whose shares are traded on the London Stock Exchange. The company is planning to raise £900 million through new share issuance to public to finance its new project of a 100-hectare wind farm in Kingston Upon Hull. The forecasted cash flows of the project are given as follows:
• Cost:
o £400 million at the beginning of the project.
o £250 million at the end of year 1 and at the end of year 2
• Revenue:
o The first revenue will be received at the end of year 3, with the value of £250 million
o The revenue will increase by £50 million a year in the following 10 years

Given all the risks associated with this business, the cost of capital for the project is estimated at 20%. All cash flows happen at the end of a year, except for the initiation cost at the beginning of the project.

This assignment requires to prepare the content of a fund-raising leaflet that would be distributed to investors at the company's annual shareholder meeting. The leaflet will need to include the following content:
• Introduction of the project to investors, explaining what the project is about.
• Commentonyour results with regard tothe profitability of the project using conventional investment appraisal methods: NPV, IRR (calculated using interpolation approach), PI, Modified IRR (calculated using the combination approach).
o Definitions of NPV, IRR, PI and Modified IRR are not required
o You are STRICTLY ADVISED to show all calculations. Results must be rounded to 2 decimal points.
o Calculations may be done in MS Excel, but not using Excel functions for the financial results.
o If you calculate the financial results with Excel functions only, you would be marked 0
o Where you have used MS Excel, show ALL the formulae you have used in your appendices.There would be a penalty of 5%of your overall mark if you fail to attach the formulae.
o All cash flow projection and calculations must be presented in the appendix.
• Market research on the prospect of the project (i.e., why this is a good or bad project to invest in given the current economic and social context)

This is a marketing material, and your manager expects that it will help persuading investors to fund the project. A different team will overseethe design of the layout of the leaflet, but they will use exactly the content which you produce. Thus, it is extremely important that you use proper language and expression in your discussion.

Referencing: Harvard referencing should be used.

Attachment:- Business and Finance Essentials.rar

Reference no: EM133301612

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