Reference no: EM132552544

EFN406 Managerial Finance Assignment - Capital Budgeting, Queensland University of Technology, Australia

Project 1 - Polycorp is considering an investment in new plant of $3 million. The project will be partially financed by a loan of $2 million, which will be repaid over five years in equal annual end of year instalments at a rate of 6.5 percent pa. The rest of the project will be financed by equity. Assume straight-line depreciation over a five-year life, and no taxes. The project's cash flows before loan repayments and interest are in the table below. Cost of capital is 12.30% pa (the required rate of return on the project). A salvage value of $190,000 is expected at the end of year five and is not included in the cash flows for year five below.

Year	Year One	Year Two	Year Three	Year Four	Year Five
Net Flows Cash	850,000	970,000	881,500	934,530	945,000

You are required to calculate:

(1) The amount of the annual loan repayment and produce a repayment schedule.

(2) NPV of the project (to the nearest dollar)

(3) IRR of the project (as a percentage to two decimal places)

(4) AE, the annual equivalent for the project (AE or EAV) (to the nearest dollar)

(5) PB, the payback and discounted payback in years (to one decimal place)

(6) ARR, the accounting rate of return (gross and net) (to two decimal places)

(7) PI (present value index or profitability index) (to two decimal places)

(8) Is the project acceptable? You must provide a decision or explanation for each of the methods in parts (2) to (7). Why or why not (provide a full explanation)? Also, a brief explanation of your treatment of Salvage Value and Loan Repayments is required.

Project 2 - You must create your own spreadsheet do not copy and paste someone else's as this will attract a mark of zero.

Polycorp Steel Division is considering a proposal to purchase a new machine to produce a new product for a three-year contract. The new machine will cost $1.83 million. The machine has an estimated life of 3 years for accounting and taxation purposes. Installation will cost a further $90,000. The contract will not continue beyond three years and the equipment has an estimated salvage value at the end of three years of $300,000. The tax rate is 29 percent and is payable in the year in which profit is earned. An investment allowance of twenty percent on the outlay plus installation costs is available. The after-tax cost of capital is 14.1%pa. Addition current assets of $85,000 are required immediately for working capital to support the project. Assume that this amount is recovered in full at the end of the life of the project. The new product will be charged $180,000 of allocated head office administration costs each year even though head office will not actually incur any extra costs or cash flows to manage the project. This is in accordance with the firm's policy of allocating all corporate overhead to divisions. The Division will incur extra marketing and administration cash outflows of $128,000 per year for the project. An amount of $200,000 has been spent on a pilot study and market research for the new product. The projections provided are based on this work. Projected sales in the first year for the new product are 40,000 units at $151 per unit per year. Unit sales are expected to increase by 4%pa for years 2 and 3. Cash operating expenses are estimated to be 75 % of sales (excludes marketing and administration, and head office items). Except for initial outlays, assume cash flows occur at the end of each year (unless otherwise stated). Assume diminishing value depreciation for tax.

Required -

(a) Construct a table showing net cash flow after tax (NCFAT). Use the method shown in lectures.

(b) Calculate the NPV. Is the project acceptable? Why or why not?

(c) Conduct a sensitivity analysis showing how sensitive the project is to operating expenses and to the cost of capital. Explain your results.

(d) Write a short report explaining your calculation of relevant net cash flows after tax, justifying your selection of cash flows. Be sure to state clearly any assumptions made (implicit and explicit).