BFA503 INTRODUCTION TO FINANCIAL MANAGEMENT - CASE STUDY ASSIGNMENT

Description:

Students will work in a team of TWO on this assignment. Your assignment involves preparing (1) 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; and (2) a video recording to discuss about the case study, your findings, and any recommendations.

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 excluded 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 35%the final mark for the unit

Due date: Sunday, 8^th May 2020 by 11.59 pm (For both written report and oral presentation)

Submission instructions:

Assignment’s written report and video recording are to be submitted through the assignment submission folder on the unit’s MyLo site. The submission folder will be available to your group upon your group enrolment on Mylo. You may only submit your assignment once. 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 a group 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 BFA503 assignments. You are asked not to discuss the assignment with other groups 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

Huonville Fisheries Company Ltd (HFC) is a company in aquacultural industry specialised in farming of aquatic organisms. HFC is considering opening a new farm near Huon Valley. This project would involve the purchase of 10 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 new equipment which cost $100,000 each. These 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 equipment will incur $8,500 maintenance cost. It is assumed that the farm will commence its operations at the beginning of the next financial year: 1 July 2022.

Before starting this new operation, HFC will need to redevelop and renovate the warehouse at the farm. HFC paid $10,000 for consultation fee and $6,000 for legal fee to develop a building plan for the warehouse. The building is expected to cost $200,000. Assume that HFC is not able to claim any annual tax deduction for the capital expenditure to the renovation of the building until the business is sold.

To commence the farm operation, HFC will also need to invest $50,000 in net working capital. This amount will change annually and has to be maintained at 5% of sales throughout the life of the project. Investment in NWC will be recovered in full by the end of the project.

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

Operating variable costs associated with the new business including material costs and labour costs. Estimated material costs per tons in year 1 is $2,000 and this cost will increase by 10% every year. The farm will require about 10 workers working for 8 hours a day, 200 days per year. The pay rate is flat at $27.5/ hour including superannuation. Annual operating fixed costs associated with production (excluding depreciation) are $100,000. Existing administrative costs are $600,000 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, HFC 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%.

Catherine, the company CFO would like you to help her 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, Catherine has asked you to write a report to HFC’s management advising them as to the best course of action regarding this project. Your report should address the following specific questions asked by HFC’s 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 flows, termination cash flows and estimate all cash flows associated with the project over 5 years. It is assumed that where relevant, capital expenditures 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.
3. Calculate the project’s payback period. Ignore the time value of money for this calculation. Briefly comment on your results.
4. Estimate the Net present value (NPV) and internal rate of return (IRR) of the project, assuming that the initial investment is funded by both debt and equity capital with the proportion of debt and equity similar to the current capital structure. Assume further that the business could be sold at the end of the five years for $1.5 million. This figure includes the value of the equipment, premises, and capital gain from the business. Briefly comment on your results and make appropriate remarks on the assumptions made for these calculations if necessary.
5. Using sensitivity analysis, recalculate NPV in Q4 using the scenario of a decrease in project sales by 10% annually. Briefly comment on the results.
6. Using sensitivity analysis, recalculate NPV in Q4 if the project is funded entirely by equity (retained earnings and new share issuance). Briefly comment on the results
7. Produce an estimate of change in cost of equity (and discount rate of the project) and the estimated cash flows of the project given the current situation of COVID-19 in Australia. How would the NPV of the project change? What is your recommendation to protect the project against adverse impact of the pandemic?
8. In view of your answer to Point 4 to point 7 above, advise HFC’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 HFC’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.