Calculate the amount of the new six-monthly repayment

Reference no: EM131934760 , Length: word count:3000

CORPORATE FINANCIAL MANAGEMENT ASSIGNMENT

The assignment contains three parts: A to C. Complete all parts.

Part A -

Q1. You have just received your credit card bill, which has an outstanding balance of $2,248.80. The credit card carries a 24 per cent nominal interest rate, which is compounded monthly.

Required - If you pay $150 each month, how long will it take you to pay off the credit card bill? Assume that the only charge you incur from month to month is the interest that must be paid on the remaining balance outstanding.

Q2. You are considering buying a bond that:

has a face value of $1,000
pays coupon interest of six per cent per year
matures in ten years.

Required - Calculate how much you would pay for this bond if you required a seven per cent yield to maturity.

Q3. Suppose you have just won the lottery and must choose one of the following (guaranteed) payoffs. Which one would you choose? The interest rate is six per cent per annum; ignore tax consequences.

(i) $1,000,000 paid today

(ii) $1,400,000 paid four years from today

(iii) $500,000 paid one year from today and $680,000 paid four years from today

(iv) Ten yearly payments of $140,000, with the first year's payment made today.

Part B -

Three years ago, Kevin and Annette borrowed $150,000, repayable by equal semi-annual installments over 15 years. The nominal interest rate at the time the money was borrowed was eight per cent per annum, calculated six-monthly. Following standard procedures, the lender calculated the semi-annual payments to be $8,674.53. Kevin and Annette have made all repayments on time and the balance owing is now $132,260.56. The general interest rate has been rising and the lender has now decided to increase the interest rate to ten per cent per annum, calculated six-monthly.

Required -

1 (i) Calculate the amount of the new six-monthly repayment if the term of the loan is unchanged.

(ii) If instead, the six-monthly repayment is left at $8,674.53, by how many repayments will the loan term increase?

2. Distinguish between simple interest and compound interest. Provide an example to illustrate your answer.

Part C -

PantherPrint is a small commercial printer of promotional material, brochures and books. The typical job is characterised by high quality promotional material, with production runs of around 5,000 units. It was established in 2013 to service the local business sector, and is located in the suburb of Heidleberg, Victoria. It currently has 30 regular clients.

PantherPrint has operated successfully since it was established and is profitable. However, there is concern that the company is in danger of losing its competitive edge as feedback has been received from some clients about the quality and reliability of their printing service. The existing printing press was purchased three years ago, and was expected to be useful for a total of eight years. However, competitors have recently purchased new presses that are more reliable, and with higher quality definition printing. It is believed that unless PantherPrint responds to the actions of its competitors, the company's profitability and loyal customer base will be eroded.

A consultant was employed to analyse the situation and a report was received from them, proposing that PantherPrint should upgrade its existing printing press with a large six-colour high quality press. The cost of the report was $6,000.

The following are relevant information extracted from the consultant's report.

Recommendation -

Replace the existing XR3500 Printing Press with the XS8600 Colour Press.

Details of the new XS8600 Colour Press

It is believed the new press will introduce cost savings through reductions in labour and electricity costs, while improving reliability and quality of the printing runs.

Cost of the new press - $900,000

Installation costs - $25,000 (these are immediately deductible for tax purposes)

Expected useful life - 5 years

Expected sale value after five years - $50,000

Tax depreciation per year - $164,000 (deduction per year as per tax act)

To finance the purchase of the new press, a loan of $900,000 from the Easi-Finance Company Ltd is available. The loan would be a fully secured interest only loan, with end-of-year interest repayments of $68,000.

The new press is a more efficient machine than the existing press. It is estimated that over the next five years, the net profit before taxes and depreciation of the company will increase to the following:

Year	Profit before taxes and depreciation
1	660,000
2	685,000
3	710,000
4	735,000
5	750,000

The new press requires a change to the working capital requirements of the company as it is a larger and operationally different machine to the existing press. The changes in working capital required are:

cash on hand would need to increase by $25,000
accounts receivable would increase by $128,000
inventories would decline by $18,000
accounts payable would increase by $120,000.

Details of the existing press and operations

The existing printing press was purchased three years ago and was expected to be useful for a total of eight years. The original cost of the press was $480,000. Estimated sale proceeds before any relevant taxes of the press are:

if sold today: $110,000
if sold at the end of its life: $5,000.

The current earnings of the company are:

Sales	1,675,000
Less cost of sales	905,000
Gross profit	770,000
Less expenses
Operating expenses	350,000
Depreciation of press	60,000
Profit before tax	360,000

Other relevant information

After reviewing the business, you believe that if PantherPrint does not replace the existing press, the above profit before tax should be maintainable for the next five years.
PantherPrint currently leases out part of its factory to a third party, for $105,000 per annum (this amount is not included in the existing earnings of the company above). The new press is much larger than the existing press. If PantherPrint purchases the new press, they will need to occupy the company's entire factory floor. The current lease can be cancelled immediately without any costs.
PantherPrint is subject to a 30 per cent corporate tax rate on income.
PantherPrint's required rate of return is 15 per cent.

Required - Write a brief report to the board of directors of PantherPrint, recommending if the company should purchase the new press. Your report should include justification of your decision by reference to capital budgeting techniques. (Suggested word limit for report is 1,500 to 1,800 words.)

Reference no: EM131934760

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Reviews

len1934760

4/9/2018 4:55:20 AM

The assignment covers contents from Modules 1 to 6 of the subject materials. The assignment is designed to enable you, at your own time and convenience, to reflect upon and apply the principles covered in the subject in a practical and focused manner. While not precluding additional research, the completion of the assignment does not necessitate any reading beyond the subject materials, prescribed readings and textbooks and the Online Learning Centre Resources. The assignment counts for 30 per cent of your total mark in this subject.

len1934760

4/9/2018 4:55:11 AM

The total word limit for this assignment is 3,000 words. You are cautioned that there are penalties for excessive word length for which marks will be deducted. There will be no penalty if the assignment exceeds this word limit by ten per cent or less. However, for every 500 words or part thereof beyond the stipulated assignment word limit of 3,000 words, ten marks will be deducted from the total of 100 marks available for the assignment. You must declare the total word length of your assignment. The date for submission is Tuesday. Due to the high degree of computational application in this subject, students are not expected to go over the stipulated 3,000 word limit. Word limits have been advised for relevant parts in the assignment.

len1934760

4/9/2018 4:55:04 AM

A number of students can feel intimidated by the material we cover in this subject, particularly because of the perception regarding formulas and calculations. While an understanding of how relevant calculations and results are obtained is important, I would like to emphasise that the subject tries to concentrate more on the principles and interpretation of results. If you find the calculations we do to be intimidating, I encourage you to ‘hang in there’ as, if you persist, I am confident that you will find the material interesting and manageable.

len1934760

4/9/2018 4:54:56 AM

The assignment this semester contains three parts, which cover material covered in Modules 1 to 6. Part A: Involves financial maths calculations — please show your workings to support your final answers. Part B: Primarily involves analysing a loan with changes to interest rates over time. Once again, ensure you show your workings. Part C: Involves examining the capital budgeting or investment decision area. The company is considering an option to replace an existing piece of equipment. Effectively, the company has two options: Keep the existing printing press; or Purchase a new printing press.

len1934760

4/9/2018 4:54:47 AM

You need to identify the relevant cash flows for each option and compare relevant capital budgeting evaluation techniques and methods. I suggest you follow the template on p 250 (Example 8.1) of the text for presenting your answer. This part of the assignment lends itself to using a spreadsheet package such as Excel — refer to pp 218–220 of the text. You should present your recommendation/answer to Part C as a report to the board of directors. In considering your recommendation, you should consider both the results of the capital budgeting quantitative techniques as well as other relevant factors/issues. The instructions say 3,000 words but I would suggest this is an equivalency measure, as a lot of the work for the assignment involves identifying the relevant cash flows and doing the calculations. A suggested word limit has been included in relation to Part C and your report. Good luck with the assignment.

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