EFN406: MANAGERIAL FINANCE Assignment: Part B, Capital Budgeting

General Information1. Marks: 10 – You must have the correct answer and a correct explanation to gain the fullmarks allocated to each part. Part marks will be allocated but you should not expect toget more than half marks if your answer is incorrect. Evaluate two projects 5 marks foreach. Be sure to show full explanations. Ambiguous answers and contradictorystatements will be penalised. Project 2 must be done in excel.2. Weight: 10%3. Format: Calculation and brief working or short answer for Problem 1. Calculations,explanations and a short report for Problem 2. (Excel/ Word)4. Word Limit: A few pages (500 words as a very rough guide; mostly calculations)5. Due: see Blackboard6. The assignment must be typed in word or excel (scanned hand written answers are notacceptable).7. Make sure to highlight or underline your final answer/s in some way. (e g Answer =$5089)8. Upload a soft copy of your Word and/or Excel files to Blackboard under Assessment bythe due date and time. Failure to upload will result in a mark of zero.9. Assignments submitted after the due date (late assignments) cannot be uploaded toBlackboard and will receive a grade of zero as per QUT policy.10. Please be aware that the suggested solution will be released within one day of thesubmission date, so no extensions will be granted for assignments in this unit.11. Extensions will only be granted in very, very exceptional circumstances and may take theform of a different assignment. Excuses like being sick on the day the assignment is dueor malfunction of computer are not considered exceptional circumstances. Studentsshould plan ahead and take into account that last minute incidents such as these arebound to occur.12. A hard copy is not required. Under no circumstances should you use assignment minder.Keep a copy for yourself.13. To avoid mixing up assignments, name your assignment using the following format:unit code, your name, your student number, and the assignment numberfor example: EFN406 Doe John n1234567 Assignment Part A.docx14. Finally, this cover sheet will form the first page of the document you submit. By submittingthis document you are agreeing to the declarations that appear on the next page:Student to complete and attach to the assignment:StudentName:StudentNumber:AssignmentNumber:Part BTitle:Assignment Part BTutor’s Name:Due Date:Day and Time ofClass:DECLARATION: By submitting this assignment I declare that:This work is entirely my own, and no part of it has been copied from any other person’s work, words or ideas, except as specificallyacknowledged through the use of inverted commas and in-text references;No part of this assignment has been written for me by any other person except where such collaboration has been authorised by theUnit Coordinator concerned; I understand my assignment may be scanned as part of the assessment process, and that plagiarismdetection software may be utlilised;This assignment has not been submitted for any other unit at QUT or any other institution, unless authorised by the relevant UnitCoordinator;I have read and abided by all of the requirements set down for this assignment.If the above declaration is found to be false, you may receive reduced or zero marks for this assignment, and you will be dealt withunder QUT’s Student Rule No. 29 – Academic Dishonesty, and the associated procedures for Academic Dishonesty which are availableat:http://www.qut.edu.au/admin/mopp/Appendix/append01cst.html#Rule29 and http://www.qut.edu.au/admin/mopp/C/C_09_07.htmlAnswer the two problems below (P1 and P2). Five marks each. Part marks will be allocated, but ifyou have the incorrect answer then you cannot expect to get more than half marks.Project 1Polycorp is considering an investment in new plant of $3.1 million. The project will be financed with aloan of $2,000,000 which will be repaid over the next five years in equal annual end of year instalments ata rate of 6.5 percent pa. Assume straight-line depreciation over a five-year life, and no taxes. The projectscash flows before loan repayments and interest are shown in the table below. Cost of capital is 12.15% pa(the required rate of return on the project). A salvage value of $255,000 is expected at the end of year fiveand is included in the cash flows for year five below. Ignore taxes and inflation.YearCash InflowYear One880,000Year Two860,000Year Three810,000Year Four910,000Year Five945,000You are required to calculate:(1) The amount of the annual loan repayment and produce a repayment schedule.(2) NPV of the project (to the nearest dollar)(3) IRR of the project (as a percentage to two decimal places)(4) AE, the annual equivalent for the project(AE or EAV) (to the nearest dollar)(5) PB, the payback and discounted payback in years (to one decimal place)(6) ARR, the accounting rate of return (gross and net) (to two decimal places)(7) PI (present value index or profitability index) (to two decimal places)(8) Is the project acceptable? You must provide a decision or explanation for each of the methods in parts(2) to (7). Why or why not (provide a full explanation)? Also a brief explanation of your treatment ofSalvage Value and Loan Repayments is required.Project 2 Calculations must be done in ExcelPolycorp Limited Steel Division is considering a proposal to purchase a new machine to manufacture anew product for a potential three year contract. The new machine will cost $1.5 million. The machinehas an estimated life of three years for accounting and taxation purposes. The contract will not continuebeyond three years and the equipment’s estimated salvage value at the end of three years is $128,000. Thetax rate is 29 percent and is payable in the year in which profit is earned. An investment allowance oftwenty five percent on the outlay is available. The after tax cost of capital is 12.85%pa. Addition networking capital of $72,000 is required immediately for current assets to support the project. Assume thatthis amount is recovered in full at the end of the three year life of the project. The new product will becharged $59,500 of allocated head office administration costs each year even though head office will notactually incur any extra costs to manage the project. This is in accordance with the firm’s policy ofallocating all corporate overhead costs to divisions. Extra marketing and administration cash outflows of$68,500 per year will be incurred by the Steel Division for the project. An amount of $159,000 has beenspent on a pilot study and market research for the new product. The projections provided here are basedon this work. Projected sales for the new product are 32,000 units at $133 per unit per year. Cashoperating expenses are estimated to be 75 percent of sales (excludes marketing and administration, andhead office items). Except for initial outlays, assume cash flows occur at the end of each year (unlessotherwise stated). Assume diminishing value depreciation for tax purposes.Required(a) Construct a table showing your calculations of net cash flow after tax (NCFAT). Use the methodshown in lectures and notes.(b) Calculate the NPV. Is the project acceptable? Why or why not?(c) Conduct a sensitivity analysis showing how sensitive the project is to operating expenses. Explain.(d) Write a short report explaining your calculation of relevant net cash flows after tax, justifying yourselection of cash flows. Be sure to state clearly any assumptions made (implicit and explicit).