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BUS 4183: Corporate Finance

23 Oct

 

 

 

BUS 4183: Corporate Finance

Assessment 3 – Project

October 2017

 

 

L. O.s Covered by this Assessment: LO 3 & 4
Special Instructions: Individual Assessment
Conditions: Written Report
% of Final Grade: 30%
Total Marks Available:
Student ID ______________________________
Section #:  

 

 

Result         / 100

 

HCT Academic Honesty Policy

Academic dishonesty will not be tolerated within the HCT. Academic dishonesty includes cheating, plagiarism (copying) or any other attempt to gain an academic advantage in a dishonest or unfair manner. Breaches of the Academic honesty policy will result in dismissal from HCT.

 

Assume that as a financial management trainee at Extra Tech Company – a computer service firm –  you have just completed the following tasks:

  • Analysis of the financial statements.
  • Analysis of capital investment projects

CEO of your company is considering investing in one of the four projects offered to your company. With no background in financial theory, he is not sure which project should be selected. In addition, he is not very much aware about the financial health of the company. He is confident about your analytical skills and want you to analyze company’s financial statements and recommend the best project for the investment.

During the meeting your CEO has provided you the financial statements and shared the details of the following four projects, all of which are considered to be equally risky with 12% minimum acceptable rate of return. The company calculated depreciation and the company’s tax rate is 35%. Previously company borrowed long term debt and paying $5000 interest expense each year.

Proposal –A:

This proposal is to buy machine. Machine is six years old and was considered a good buy at $400,000. In return, the machine would bring the following revenue and operating costs.

 

  YR-0 YR-1 YR-2 YR-3 YR-4 YR-5
Initial investment (400,000)          
Revenue   44,000 78,000 112,300 225,000 168,750
Operating costs   11,250 12,000 12,500 13,000 14,000
Depreciation Expense   60,000 60,000 60,000 60,000 60,000

 

 

Proposal –B:

This proposal is to buy copy machines. The new business was expected to bringthe following revenue and operating costs.

 

  YR-0 YR-1 YR-2 YR-3 YR-4 YR-5
Initial investment (600,000)          
Revenue   87,500 175,000 262,500 393,750 525,000
operating costs   26,000 27,000 29,000 30,000 32,000
Depreciation Expense   110,000 110,000 110,000 110,000 110,000

 

 

 

 

Proposal—C:

This proposal is to buy a Jet. The Jet was expensive and, counting additionaltraining and licensing requirements. However, it would give the company access to a wider market as well.

Following are key financial figures:

 

  YR-0 YR-1 YR-2 YR-3 YR-4 YR-5
Initial investment (800,000)          
Revenue   200,000 300,000 400,000 450,000 500,000
Operating costs   60,000 85,000 95,000 98,000 105,000
Depreciation Expense   140,000 140,000 140,000 140,000 140,000

 

 

 

Proposal – D:

This proposal is to begin operating a fleet of trucks. Ten trucks could be bought for only $61,000 each, and the additional business would bring above $700,000 in new sales in the first two years alone. Following are key financial figures

 

  YR-0 YR-1 YR-2 YR-3 YR-4 YR-5
Initial investment (610,000)          
Revenue   382,500 325,125 89,250 76,500 51,000
Operating costs   31,000 31,000 31,000 31,000 31,000
Depreciation Expense   102,000 102,000 102,000 102,000 102,000

 

CEO has particularly discussed his worries/ concerns of the recent economic conditions and his speculation is that operating cost might increase by 8% than expected and revenue might decrease by 5% than the expected!

 

 

You are planning to use internal rate of return, and net present value evaluation methods.

You are facing one constraint that there is no outside financing be used this year. CEO is against a stock issue for fear of diluting earnings and his control over the firm. As a result, the size of the capital budget this year is limited to $800,000, which meant that ONLY ONE of the four projects under consideration could be chosen. You are not too happy about the situation but you have to concentrate on selecting the best of the four.

Do not forget that selection of the project also depends upon the sensible financial analysis of the last two years’ financial statements of the company. You can convince your boss with sound financial analysis and sensible arguments!

 

 

 

ExtraTech Company

Income Statements for last two years

(All in ‘000)

  Dec 31st 2016 Dec 31st2015
Sales $ 7650 $ 11500
Less: Cost of sales   5800   9430
Gross profit   1850   2070
Less: Selling and Admin. Expenses   100   120
Less: Lease Payments   50   50
EBIT   1700   1900
Less: Interest   50   350
EBT   1650   1550
Less: Taxes   600   550
EAT (Net Income)   1050   1000
Dividends paid   300   300
Transferred to retained earning   750   700
         
Balance Sheet for last two years
  Dec 31st 2016 Dec 31st 2015
ASSETS        
Current Assets $ $ $ $
  Cash 900   50  
  A/Receivable 1200   3800  
  Inventory 1500   2450  
Total Current assets   3600   6300
Fixed Assets   10050   11350
Total assets   13650   17650
LIABILITIES        
Current Liabilities        
  A/Payable 1800   2150  
Tax payables 600   550  
Total Current Liabilities   2400   2700
Long term Debt   350   3350
Total Liabilities   2750   6050
SHAREHOLDERS’ EQUITY        
  Common Stock, $10 par 5900   5900  
  Retained Earnings 5000   5700  
Total Shareholders’ Equity   10900   11600
Total Liabilities. & Shareholder’s Equity   13650   17650

 

 

 

 

Requirements:

 

This is an individual project.

Part A: (You can use MS-Excel to do the ratios)

 

Cover Page                              (1 mark)

Table of contents                    (1 mark)

Executive Summary                (2 marks)

 

Calculate the following key ratios for year 2015 – 2016; (8 marks)

 

  • Profit margin ratio (ii) Return on Equity Ratio (iii) Receivables turnover (iv) Inventory turnover (v) Fixed assets turnover (vi) Current Ratio (vii) Quick ratio (viii) Debt to total assets

 

  • Analyze the financial statements of Extra Tech Company for both years and comment in detail over the financial health of the company during year 2016 under four areas: (40 marks)
  • Liquidity
  • Asset Utilization
  • Debt Utilization
  • Profitability

 

  • Provide suggestions for improvements for each of these four areas. (8 marks)

 

 

Part B:You will use MS-Excel to do the calculations in this case.

(Use a different worksheet for each of these proposals – Ex: Sheet 1 – Proposal A; Sheet 2 – Proposal B…)

 

  1. Calculate the Cash flows for each of the proposals. (16 marks)
  2. Calculate the following for each of the proposals in the case

 

  1. Net Present value (NPV) (4 marks)
  2. Internal rate of return (IRR) (4 marks)

 

Alternative Scenario:

  1. What would happen if operating cost were 8% higher than expected and revenue is 5% lower than the expected?

Note: Calculate BOTH evaluation methods again and check whether your decision will change? If yes – Why?            (12 marks)

 

  1. Provide recommendation as to which proposal should be adopted in each scenario and the reasons for your recommendation in order to address his concerns and convince him of your choice. (4 marks)

 

 

 

SUBMISSION REQUIREMENTS

 

You will submit the following:

  1. The Excel spreadsheet – complete with calculations
  2. Financial Statements Analysis Report to the CEO
  3. Capital Budgeting Analysis report justifying your decisions
  4. Word limit is 2500-3000 words for the report (excluding calculations)
  5. Font: Times New Roman; size 12; 1.5 spacing.
  6. Hard copy submission:=; Due date: Sunday November 19, 20174:00 PM
  7. Soft copy should be submitted in BB learn same day.
  8. AS per HCT grading policy, failure to submit the report on time will result in 5% reduction in the grade per day lateness.

 

 
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Posted by on October 23, 2017 in academic writing, Academic Writing

 

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