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BFA107 – FINANCIAL MANAGEMENT College of Business and Economic
Description:
BFA107 FINANCIAL MANAGEMENT Semester 2, 2018 Assessment 2: Written assignment Assessment: 15%
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 refers to the written analysis section of the assignment only and 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. Title pages, calculations section, reference lists and appendices are included in the word count.
Assessment criteria:
Please see the assessment rubric uploaded on MyLo under assessment 2 folder for information on the assessment criteria which will be applied when marking the assignment.
Percentage weighting: This assignment is worth 15%the final mark for the unit Due date: Saturday, 18 May 2019 by 5pm
Submission instructions:
Assignment are to be submitted through the assignment submission folder 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 assignment 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.
Submitted electronic files must be named as follows:
- For Hobart students: HD_Student’s ID_Last name (Ex: HB_123456_Smith)
- For Launceston students: LC_Student’s ID_Last name
- For Cradle Coast students: CC_Student’s ID_Last name
- For Distance students: DS_Student’s ID_Last name
Semester 1, 2019
CASE STUDY
Tasmanian Motor Rental (TMR) is set up as a proprietary company in car rental industry and is considering whether to enter the discount rental car market in Tasmania. This project would involve the purchase of 100 used late model, mid-sized cars at the average price of $15,000. In order to reduce their insurance costs, TMR will have a LoJack Stolen Vehicle Recovery System installed in each car at a cost of $1,500 per vehicle. The rental car operation projected by TMR will have two locations: one near Hobart airport and the other near Launceston airport. At each location, TMR owns an abandoned lot and building where it could store its vehicles. If TMR does not undertake the project, the lots can be leased to an auto-repair company for $90,000 per year (Total amount for both lots). The $25,000 annual maintenance cost (total for both lots) will be paid by TMR whether the lots are leased or used for this project. This discount rental car business is expected to result in a fall in its regular car rental business by $20,000 per year.
For taxation purposes, the useful life of the cars is determined to be five years and they will be depreciated using the straight-line depreciation method over 5 years with no residual values at the end. It is assumed that the cars will first be used at the beginning of the next financial year: 1 July 2019.
Before starting this new operation, TMR will need to redevelop and renovate the buildings at each airport locations. This is expected to cost $215,000 for both locations. Assume that TMR is not able to claim any annual tax deduction for the capital expenditure to the renovation of the building until the business is sold. TMR has also budgeted marking costs what will be spent prior the start of operation, during the first two years of operation. The estimated costs are $30,000 per year. These costs are fully tax deductible in the year they are incurred. In addition, if the project is undertaken, a total new injection of $150,000 in net working capital will be required. There will be no additional working capital required from the commencement of the operation until the end of the project. The initial networking capital will be recovered in full by the end of year 5.
Revenue projections from the car rental for the next five years are as follows:
Beginning Ending
Revenue ($ ‘000)
Year 1 1/7/2019 30/6/2020 850
Year 2 1/7/2020 30/6/2021 1,050
Year 3 1/7/2021 30/6/2022 1,100
Year 4 1/7/2022 30/6/2023 1,250
Year 5 1/7/2023 30/6/2024 1,250
Operating variable costs associated with the new business represent 10% of revenue. Annual operating fixed costs (excluding depreciation) are $1,800 per vehicle. Existing administrative costs are $550,000 per annum. As a result of the new operation, these administrative costs will increase by 20%. The company is subject to a tax rate of 27.5% on its profits as well as on the capital gain tax.
Semester 1, 2019
TMR currently holding 1.5 million debt borrowed at the cost of 6.5%. Company’s shares are considered high risk securities with beta of 1.4. Current market risk premium is 8% and risk free rate is 2%.
Catherine, the company CFO would like you to help her examine the viability of the project for the next five years.
Your tasks:
Based on the information in the case study, Catherine has asked you to write a report to TMR’s management advising them as to the best course of action regarding this project. Your report should address the following specific questions asked by TMR’s management:
- 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
- How are possible cannibalization and opportunity costs considered in this analysis?
- Determine the initial investment cash flow.
- Estimate all cash flows associated with the project over 5 years. It is assumed that where relevant, capital expenditures and marking costs are expended throughout the year, while cash flows relating to revenue and operating costs occur at the end of the year. You will need to broadly describe the method used for determining those cash flows.
- Calculate the project’s payback period. Assuming the business will continue at the end of year 5 so ignore the possible terminal value of all assets (Car fleet and premises). Ignore the time value of money for this particular calculation. Briefly comment on your results
- Estimate the Net present value (NPV) of the project, assuming that the initial investment is entirely funded by equity capital (retained earnings and new share issue). Assume further that the business could be sold at the end of the five years for $1 million. This figure includes the value of the car fleet, premises and capital gain from the business. Ignore any possible tax consequences of selling the business. Briefly comment on your results and make appropriate remarks on the assumptions made for these calculations if necessary.
- Refer back to point 6, calculate the NPV of the project given that the project will be funded by 60% of debt and 40% of equity. Briefly explain the calculation of discount rate. Comments on the change in NPV between point 6 and point 7.
- In view of your answer to Point 5 to point 7 above, advise TMR’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.
Semester 1, 2019
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 TMR’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.
Semester 1, 2019
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