Reference no: EM13834247

Case study: AusSteel

Introduction

This assignment consists of two parts:

Part A:

Part A is to be submitted in the form of a report of not more than 3,000 words. The report is required to respond to seven (7) questions addressing the capital budgeting aspects of the AusSteel case study.

Part B:

Part B is not part of the formal report. It consists of a single Capital Rationing question.

Assignment Details

1. The assignment has a weighting of 30% of your overall mark for the unit. Your group mark will be converted to a score out of 30. All members of the group will receive the same mark.

2. All students should have been enrolled in a group (of 2-4 students) to submit the assignment on CloudDeakin. You can form a group with any student from any campus, cohort or seminar group. The only requirement is that all members should be currently enrolled in Trimester 2, 2015 offering of MAF 203.

3. All assignments are to be submitted online in an area provided in CloudDeakin. They are counted as "on time" if submitted by 5pm AEST or AEDST on the due date.

Detailed Requirements

1. Free Cash Flows (FCF)

Prepare a cashflow statement for the AusSteel project.

2. Net Present Value (NPV) and Internal Rate of Return (IRR)

Calculate the NPV and IRR for AusSteel's proposed project.

Compare and contrast the NPV and IRR methods.

3. Sensitivity Analysis

Perform a sensitivity analysis on NPV of the new project, applying a +/-10% variation factor to the estimates for

• output and sales
• selling price
• variable costs
• fixed overhead costs
• incremental working capital; and
• applicable discount rate.

Identify the most sensitive variable/s, and comment on your analysis.

4. Weighted Average Cost of Capital (WACC)

Under what circumstances (conditions) is it appropriate to use the weighted average cost of capital (WACC) of a company, as the hurdle rate for accepting/rejecting a project?

Do you think it is appropriate to use WACC as the hurdle rate (cost of capital) for evaluating this project? Why?

5. Impact of Inflation

Explain the impact inflation will have on AusSteel's proposed project.

6. Qualitative risk factors

Refer to the companion document titled "Steel Has Never Been More Competitive" published by the Australian Steel Institute.

What other qualitative factors (i.e. factors which are unquantifiable at present) would you consider relevant in evaluating the riskiness of the project.

7. Executive Summary (recommendation)

Write your recommendation (with reasons), in a form of an executive summary, on whether to accept or reject the project.