FoneBuzz Ltd, an
Australian manufacturer of lightweight tablet computers, is
considering expanding
its Australian operation into producing tablet computers. The
Chief Financial
Officer (CFO) of the company, Ms Michelle Smith, believes
there will be
significant opportunities for growth for the company in the
tablet computer
market and is therefore looking to construct a new
manufacturing plant in
Sydney. FoneBuzz Ltd has not manufactured tablet computers
before but they have
extensively researched the market and believe they can
compete successfully.
For this expansion Ms Smith has two options. The first
option,
Plant A, is a highly automated process that involves
significant capital
outlays but has lower running costs. Plant B is a more labour
intensive
facility that has lower initial capital outlays but higher
running costs. Plant
A and Plant B are mutually exclusive projects.
As Ms Smith’s assistant you have been asked to prepare an
analysis of
the projects to enable her to make a recommendation to the
board of directors.
To assist your evaluation Ms Smith has provided you with the
following
information:
i)
Sales for Plant A tablet computers amount
to 145,000 units per year, starting next year, with sales
increasing in line
with economic growth.
Sales for Plant B tablet
computers amount to78,000
units per year, starting next year, with sales increasing in
line with economic growth.
ii)
The Plant A tablet computer has a
selling price of $300 next year, increasing in line with
inflation.
The Plant B tablet computer has a selling
price of$460 next
year, increasing in line with inflation.
iii)
The nominal economic growth rate is
projected to be 5% per year.
iv)
Both proposals are expected to remain
in operation for 5 years. At the end of the fifth year the
machinery will be
sold for 15% of its initial value.
The land
and buildings will be retained by the company.
v)
Last year, FoneBuzz Ltd. paid MacBank $120,
000 for a feasibility study that confirmed the manufacturing
expansion was
economically viable.
vi)
The machinery is considered depreciable
for tax purposes and will be depreciated using a straight
line depreciation
method down to its salvage value. The land, buildings and
furnishings are not
depreciable for tax purposes.
vii)
Plant A will require a provision of
($2,015,000)
in working capital and Plant B will require a provision of
($3,015,000) in
working capital. These requirements will remain unchanged
over the life of the
plants.
viii)
There will be additional Sales and
Marketing expenses if the project goes ahead. Annually,
Project A will incur $350,000
and Project B will incur $2,000,000.
ix)
Head Office expenses will not
increase.
However, a fixed allocation of
$150,000 per year will be charged to whichever project goes
ahead.
x)
All
operating
expensesare expected to remain constant.
xi)
FoneBuzz Ltd. is subject to a tax rate of
30%.
Tax is paid in the year after it is
incurred. [Do not make any other assumptions about the
company’s tax liability.]
xii)
Both proposals are considered
not to be in line
with the
company’s core business and are of different risk.
FoneBuzz
Ltd.’s
realWACC is 8.60%.
The
nominalWACC used by the Computer Tablet industry is
10%.
xiii)
Inflation is projected to be 3% per
year for the five year period.
Other
information:
Plant
|
Plant
|
||
Initial
* Land
* Buildings
* Machinery
* Furnishings and fittings
|
$12,500,000
$84,050,000
$26,150,000
$3,459,000
|
Initial
* Land
* Buildings
*
* Furnishings and fittings
|
$12,500,000
$71,050,000
$10,150,000
$3,459,000
|
Operating expenses:
* Fixed costs
* Variable costs per unit
* Labour costs per unit
|
$900,000
$21.80
$14.20
|
Operating expenses:
* Fixed costs
* Variable costs per unit
* Labour costs per unit
|
$800,000
$35.80
$25.00
|
Required:
- Calculate
the NPV and the IRR of Plant A and Plant B; and explain whether the
‘systematic risk’ of Plant A and Plant B has been priced into the
NPV. 10 marks - Explain
whether the NPV and the IRR methods of project evaluation satisfy the
objective to maximise shareholder wealth.
To what extent does the NPV, and the IRR decision, depend on the
Capital Market operating efficiently? 10 marks
Assessment Criteria:
Learning Outcomes
|
Possible Marks
|
investment
|
10 marks
|
|
10 marks
|
Thanks for installing the Bottom of every post plugin by Corey Salzano. Contact me if you need custom WordPress plugins or website design.
The post finance :npv and irr first appeared on https://allaplusessays.com/order.
finance :npv and irr was first posted on September 17, 2020 at 9:25 am.
©2019 "Submit Your Assignment". Use of this feed is for personal non-commercial use only. If you are not reading this article in your feed reader, then the site is guilty of copyright infringement. Please contact me at email_off [email protected] /email_off
“Are you looking for this answer? We can Help click Order Now”
The post finance :npv and irr first appeared on Nursing Essays Writers.
“Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!”
The post finance :npv and irr first appeared on nursing writers.
"Is this question part of your assignment? We Can Help!"












Other samples, services and questions:
When you use PaperHelp, you save one valuable — TIME
You can spend it for more important things than paper writing.