BFA107 – FINANCIAL MANAGEMENT

Description:

Semester 1, 2021 Assessment 2: Written assignment Assessment: 20%

Your assignment involves preparing a written report where you will present an analysis of financial information relating to a capital investment project described in the attached case study and provide recommendations that will assist the firm in its decision making.

Length:

1,500 words maximum – this requirement is a “maximum”. Students will not be penalised for using fewer words and making their report more succinct. If you submit over-length work, there will be an automatic 10% penalty of the total possible marks for this assessment. Cover page, reference lists and appendices are excluded in your word count.

Assessment criteria:

Please see the assessment rubric uploaded on MyLO under “assessment tasks” in “content” for information on the assessment 2 criteria which will be applied when marking the assignment.

Percentage weighting: This assignment is worth 20% of the final grade for the unit. Due date: Friday, 7 May 2021 by 5pm Submission instructions:

Assignment are to be submitted through the assignment submission folder (assessment task 2) on the unit’s MyLO site. There will be no paper submission. You may only submit your assignment once. A signed assignment coversheet should be downloaded from the assessment folder on MyLO and must be submitted. Assignments without a coversheet will not be marked. The date stamp on the electronic submission will determine if your assignment has been submitted on time. Late work will be penalised unless you have been granted an extension by the unit coordinator.

This is an individual assignment. Under no circumstances should you share your workings or any part of your assignment with other students – this constitutes academic misconduct and actions will be taken. All similarity report on Turnitin will be thoroughly checked for matching with external sources and with other BFA107 assignments. You are asked not to discuss the assignment with other students on MyLO. You may ask general questions on MyLO if there is something you need clarified but you should not discuss any calculations or where you have found any relevant information with other students.

Case Study:

Trump De Drum Ltd (TDT) is a company in aquacultural industry specialised in farming of aquatic organisms. TDT is considering opening a new farm in Taroona. This project would involve the purchase of 13 hectares land at a price of $1,000,000 (Note that: The land is not subject to depreciation for accounting and tax purposes). In addition to that, the company will need to purchase eight special equiments which cost $120,000 each. The equipments are expected to be in use for 5 years and after that, they will be scrapped without any residual value. Each year, each of these equipments will incur $7,000 maintenance cost. It is assumed that the farm will first be used at the beginning of the next financial year: 1 July 2021.

Before starting this new operation, TDT will need to redevelop and renovate the warehouse at the farm. This is expected to cost $240,000. Assume that TDT is not able to claim any annual tax deduction for the capital expenditure to the renovation of the building until the business is sold.

Revenue projections from the farm for the next five years are as follows:

Beginning Ending Production quantity (tons) Price (per tons)

Year 1 1/7/2021 30/6/2022 120 $9,000

Year 2 1/7/2022 30/6/2023 145 $9,200

Year 3 1/7/2023 30/6/2024 170 $9,250

Year 4 1/7/2024 30/6/2025 180 $9,300

Year 5 1/7/2025 30/6/2026 185 $9,350

Operating variable costs associated with the new business including material costs and labour costs. Estimated material costs per ton in year 1 is $2,100 and this cost will increase by 3.5% every year. The farm will require about 6 workers working for 8 hours a day, 200 days per year. The pay rate is flat at $22/ hour including superannuation. Annual operating fixed costs associated with production (excluding depreciation) are $100,000. Existing administrative costs are $550,000 per annum. As a result of the new operation, these administrative costs will increase by 30%. The company is subject to a tax rate of 30% on its profits.

Meanwhile, TDT Ltd is currently financed by 60% of equity and 40% of debt. Company’s bond is traded at a price of $980. The bond has 10 year term, 8% coupon rate paid semi-annually and face value of $1,000. In addition, company’s equity has a beta of 1.2 while the risk-free rate in the market is 3% and market portfolio return is estimated to be 12%.

Ms Sarah, the company CFO would like you to help him examine the viability of the project for the next five years, taking into account the projections of sales and operations costs prepared by company’s accountants.

Your tasks:

Based on the information in the case study, Ms Sarah has asked you to write a report to TDT’s management advising them as to the best course of action regarding this project. Your report should address the following specific questions asked by management:

1. Discuss which costs are relevant for the evaluation of this project and which costs are not. Your discussion should be justified by a valid argument and supported by references to appropriate sources.

2. Determine the initial investment cash flow.

3. Estimate all operating cash flows associated with the project over 5 years.

4. Calculate the project’s payback period. Assuming the business could be sold at the end of the five

   years for $1 million. Briefly comment on your results.

5. Calculate the Net present value (NPV) of the project, assuming that the initial investment could be

   sold at the end of the five years for $1 million. Briefly comment on your results and make appropriate

   remarks on the assumptions made for these calculations if necessary.

6. Estimate the Internal rate of return (IRR) of the project. Briefly comment on your results.

7. Using sensitivity analysis, recalculate NPV using the scenario of

   1. A decrease in project sales by 9% annually.

   2. An increase of the sale price by 5.5% annually.

   3. An increase of material costs change from 3.5% every year to 7% every year.

   Briefly comment on your results.

8. In view of your answer to Point 4 to point 7 above, advise TDT’s management as to whether they should go ahead with the investment project. In your recommendations, you may wish to suggest possible refinements in the method used for evaluating this project.

ASSIGNMENT INSTRUCTIONS:

• Your assignment should be presented as a structured report with an introduction, a main body and a conclusion, but without inclusion of any calculations in the main body.

• The main body of the report may include headings addressing the specific questions asked by TDT’s management.

• The final part of your assignment (Point 8 above) should include a general recommendation to management regarding the best course of action in the intended project. If you believe that further information is required before making a firm recommendation, you need to specify what information would be required.

• Any assumption that you may rely upon for your analysis and recommendation should be clearly stated in the main body of your report.

• All calculations should be presented in appendices to the report. Calculations may be prepared in an excel document, however your submission must be in the form of a single word document including the report itself and the appendices.

• All external sources used to support your argument should be appropriately acknowledged in the main body of your report using the Harvard style (Author-date) of referencing. This includes textbook sources but not the case study itself. A list of the full citation should be included at the end of the main body of your report. References will NOT be included in your word count.