Determine the free cash flows of the new project

Assignment Help Corporate Finance

Reference no: EM133693306

Assessment Task - Business Project Report & Presentation

Task: This assignment will require your team to provide a report and give a presentation to the management of your company, to help them decide on undertaking a new project.

Case
'Your learn has just been hired by Teistra Group Limited (ITS) to advise the company's capital budgeting division about a proposed new project.

Teistra Group Limited is an Australia-based telecommunications and technology company. The company offers a full range of communications services. The company provides approximately 18.8 million retail mobile services. 3.8 million retail fixed bundles and standalone dale services, and 960,000 retail fixed standalone voice services in Australia. The company operates through four segments: Telstra Consumer and Small Business (TC&SB), Telstra Enterprise (TE), Networks and IT (N
The presentation should include (at a minimum') the following information:
( 1) An introduction of each of the team members and their financial expertise.
(2) A brief discussion of the project and the two alternative options under consideration.
(3) A demonstration of the expected yearly cash flows from each of the two options. Remember, members of the senior management team often do not have a finance background, so you will have to present clear tables that show the calculation of the free cash flows. and clearly explain how the free cash flows were computed. Essentially, you need to explain to them in your presentation how capital budgeting works.
(4) A demonstration of the NPV and the IRR of each of the two options, and other additional analyses. Again, you will need to explain to the executive team what exactly these capital budgeting metrics are, how they are computed and why they are helpful for making investment decisions Include critical notes with each of the decision rules if you see fit.
(5) Advise on which option the company should go ahead with. Provide clear reasoning for your advice.
amp;1T), and Telstra infraCo. TC&SB segment provides telecommunication. media and technology products and services to consumer and small business customer's in Australia using mobile and fixed network technologies, TE segment provides telecommunication services, advanced technology solutions, network capacity and management, unified communications, cloud, security, industry solutions, integrated and monitoring services to government and large enterprise and business customers in Australia and globally.

TLS has recently conducted a comprehensive market study which costed them 5200,000. The findings of this study indicate that it is critical for the company to upgrade its infrastructure to meet customer demand for its National Broadband Network (NBN) services. Based on the results of the study, the infrastructure upgrade is projected to span last seven years. aligning with estimated market demands and technological advancements. During this period, the upgrade is anticipated to generate an additional $100,000,000 in revenues per year far the company. To proceed with the upgrade, the company requires some critical hardware components. The management has identified two options: (1) In-house production which requires the company to establish its own production facility; and (2) Outsourcing which implies external procurement of the necessary hardware.

After a careful anaiysis, the management has worked out the following details for the two options:

Option 1: inMouse production
The purchase and installation of machinery will initially require a capital expenditure equal to 1.5% of Teistra' net property, plant, and equipment (PPE), as per the financial year ended 30 June 2023. The machinery has an expected life of ten years. The company will fully depreciate the machinery by the straight-line method over its fife. At the end of the project. the machinery can be sold at en expected residual value of 15% of their original values. The company will borrow $100 million to (partly) finance this project, at an interest rate of 6% per annum.
The project requires staff to be specially trained to use the new machinery; fortunately, a similar equipment was purchased a year ago, and at that time the staff went through the 5100.000 training program needed to familiarise themselves with [he type of equipment. The company's management Is uncertain whether to charge half of this $100,000 training fee to the project, Annual maintenance cost of the machinery is $150,000. The collective cost of the hardware components to be manufactured is estimated to be $2,010,000 in Year 1 with an expected increase of 5% per annum In the following years. TLS also needs to invest in necessary development software and maintain the licenses. The negotiated licensing fee for the software is estimated to be $105,000 per year.
Before the start of the project the net working capital will have to be adjusted. After that, net working capital will remain at the same level until the end of the project, when the NWC will be re-adjusted to its original values before the start of the project_ The inventory requirements are expected to he 30% lower compared to the company's existing projects. which means that the inventory as a proportion of revenues for this project will be 30% lower than the company average last year (i.e., the financial year ended 30 June 20231_ The accounts payables requirements will be 25% higher than TLS's other projects, and the accounts receivable will be same as the other projects (Note: use the 'Total Receivables, Net).

Option 2; Outsourcing
Alternatively, TLS can contract with a firm named Innovative Equipment Limited (IEL) which Is specialised in manufacturing the required hardware. eased on the types and expected number of units TLS would need, IEL management has quoted a total cost of $75,000,000 in Year 1 which will continue to grow at 4.5% per annum to keep up with the rising cost and forecasted growth in the number of the required units. Also. IEL requires that TLS pays 85% of the expected cost for a year in advance at the beginning of that year. From the accounting perspective, equipment that are procured from IEL may be classified as cost of goods sold in the books of TLS. Hence. they will be treated as operating expense for the business.

1) Obtain Teistra' (ticker code: TLS) financial statements. Download the annual income statements, balance sheet and cash flow statements for the last financial year (i.e., the financial year ended 30 June 2023), One place to find Telstra' financial statements is on invesliruicom, find the company and click on Financials. Make sure to get the annual financial statements, instead of the quarterly.
2) You are now ready to determine the free cash flows of the new project. Set up a timeline in a spreadsheet, which allows you to compute the free cash flows of the project on a yearly basis, in a separate column for each year of the project life. Be sure to make outflows negative and inflows positive. Note that TLS's tax rate can be determined by dividing its income taxes by its income before tax in 2023.
3) Assume that the project's cost of capital will be equal to 8%.

Report
The company is asking your team to analyse the two given options and make recommendations to TLS about the option they should choose. The results of your analyses will have to be presented as a business report to Telstra' executive management team. The executive management team will expect much more from the report, than just a table(s) with the NPV and IRR. results. The report should have a maximum of 2.000 words, excluding appendices. Remember, members of the executive management team often do not have a finance background.
• The report should provide clear advice on which option the company should go ahead with.
• The advice of your team should be based on your estimations of the NPV and the IRR of each of the two options. Remember, members of the executive management team often do not have a finance background, so your results will have to be supported by clear tables which show the calculation of the Free cash flows; clear explanations of how the free cash flows were computed, what issues the capital budgeting team had to deal with. and what choices were made in these computations, and why.
• The estimated figures on the proposed project, for example the yearly revenues that the project will generate in the future, are of course just estimations - nol certainties. If the company decides to go ahead with the recommended option, these values may turn out to be different than expected. The revenues may be higher or lower than projected for example, or the cost of capital of the company could be higher or lower in the future than it currently is. Therefore. your learn needs to perform some additional analyses. Firstly. present a NPV profile. which illustrates the NPV of the project at various values for the cost of capital. Secondly, recompute what the NPV and the IRR of the project would be if, for example, the revenues of the project turn out to be 25% lower than projected. Your team is encouraged to provide additional 'sensitivity' analyses of this sort,

• A summary of recent insights in the market for NBN services sourced from reputable and credible business finance articles. Ensure that references are included.

Professional presentation of a visually appealing report is essential for business communication. Business reports are structured with:
• an executive summary
• table of contents
• informative headings and sub-headings
• numbered sections
• page numbering
• professionally designed and labelled graphs and tables
• a reference list.

Recorded Group Presentation
Your team is also required to make a recorded group presentation to present the results of your analyses to the company's execulive management team. Your learn has 10 minutes (maximum) for the presentation. The presenter needs to show your face while presenting. All team members must participate in the presentation. Recording the presentation can be done Using Microsoft PowerPoint and must be exported in a video format (See an example on how to do it). The presentation needs to be supported using a slide deck.

The presentation should include (at a minimum') the following information:

(1) An introduction of each of the team members and their financial expertise.

(2) A brief discussion of the project and the two alternative options under consideration.

(3) A demonstration of the expected yearly cash flows from each of the two options. Remember, members of the senior management team often do not have a finance background, so you will have to present clear tables that show the calculation of the free cash flows. and clearly explain how the free cash flows were computed. Essentially, you need to explain to them in your presentation how capital budgeting works.

(4) A demonstration of the NPV and the IRR of each of the two options, and other additional analyses. Again, you will need to explain to the executive team what exactly these capital budgeting metrics are, how they are computed and why they are helpful for making investment decisions Include critical notes with each of the decision rules if you see fit.

(5) Advise on which option the company should go ahead with. Provide clear reasoning for your advice.

Reference no: EM133693306

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