ECF6110 Business Finance Assessment:
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SCHOOL OF BUSINESS AND LAW
Assignment
Semester 2, 2022
ECF6110 BUSINESS FINANCE
DUE: Friday 23rd September 2022, 6:00 pm
You are required to attempt the case study “XYZ Company” which accounts for 25% of the assessment for this unit. The objective of the assignment is to allow you to apply the theories, principles, and techniques that you have learned in the class to analyse a business situation. It is important to demonstrate your knowledge of financial concepts, tools, and critical thinking in analysing the case.
The assignment is to be completed in a group of three students. Please ensure that individual names and student ID numbers of your group members are recorded on the first page of the assignment. The following rules will apply to group work:
- Every member in the group is expected to attend the group meetings and contribute his/her share of the Assignment work in a timely manner. If this is not done, then marks may be deducted accordingly.
- Should team conflict issues arise, then they need to be resolved before submission. Only in cases where every effort has been made to resolve any problems should the lecturer be asked to intervene.
Submission information
An electronic copy of the Assignment that includes the group member details (student id and full name) is to be submitted online on Canvas before the due date.
Late submission will attract a penalty as per University guidelines. A penalty of 5% of the maximum assignment mark is applied for every calendar day that your assignment is late, and a mark of zero for the assignment submitted after 7 calendar days.
Grading:
Your assignment will be graded on the standard of presentation, good understanding and logical arguments in analysing the problems, and accuracy in deriving the solutions. Please read the assignment rubric for a detailed marking guide.
Extensions:
Requests for extensions must be made in writing before the due date. Requests for extensions on the grounds that you have other assignments due at the same time are very unlikely to be granted. Requests for extensions after the due date must be accompanied by a medical certificate.
Length and Presentation:
There are no specific word limits; however, the report, including the Appendices, should not be more than 20 pages with a 1.5 line spacing and 12 Times New Roman font size. Answers are expected to be literate and coherent.
Referencing:
You must include in-text referencing where appropriate, and all assignments should have a bibliography. All referencing should be in accordance with the University Referencing Guide, which is available from the ECU Library homepage.
Academic Misconduct and Plagiarism
Edith Cowan University regards academic misconduct of any form as unacceptable. If some form of academic misconduct has been committed then an appropriate penalty will be applied as outlined in the ECU Handbook.
Please note that Turnitin will check your submitted Assignment for improper citation, potential plagiarism, or collusion by comparing against the academic database and other students’ work.
XYZ Company
Please read the case of XYZ Company before starting this assignment.
Your task as a financial analyst is to prepare a project evaluation report to executive committee of XYZ Company indicating whether the firm should accept or reject the new project. Your report should include the answers to the following Questions 1 to 4. It is important to list your assumptions in applying the project evaluation methods, and show clearly the workings in deriving your results. Your assignment will be graded on presentation, understanding of the issues, critical analysis, logical explanation, and accuracy of calculations in solving the problems. The mark allocations for individual questions (including 20 marks for presentation, writing and professional communication) will total to 100 marks and will be scaled to produce a mark consistent with 25% weighting in the unit assessment.
QUESTIONS
- Prepare cash flow tables (which incorporates taxes and includes initial investment, operating, and terminal cash flows) for each chip crusher. Compute net present value (NPV), payback period, NPV infinity, effective annual value (EAV) and internal rate of return to recommend either lower-cost chip crusher (LCC) or higher-cost chip crusher (HCC).
[30 marks]
- Undertake research to identify the qualitative factors (i.e. factors which are unquantifiable at present) that would affect the accept/reject decision of the project?
[10 marks]
- It is necessary to check if the project made financial sense before it is accepted. Therefore,
- Conduct a sensitivity analysis of NPVs to change in the annual revenue and operating costs individually. Assume each of these variables can deviate from its estimated value by plus or minus 15%. [Hint: Provide the answers to this question even if you decide to reject the project.]
- Analyse the effect of inflation on both machines. For simplicity, assume no other cash flows apart from the sales revenues and operating costs are affected. For both chip crushers, the sales revenues are expected to increase by the 5 percent rate beginning after Year 1. However, the annual operating costs are expected to increase by only 3 percent annually.
[20+10=30 marks]
- Consider all information given in the case study and the results derived in Questions 1 to
3. Advise the executive committee on whether they should invest in an LCC or HCC. Discuss the reasons for your recommendation and the issues the XYZ Company needs to take into account, given this advice.
[10 marks]
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Case in Finance
XYZ Company
XYZ Limited is a manufacturer of transmissions and axles used in the harvesting equipment of the agricultural industry. The manufacturing process is quite extensive, resulting in a vast amount of bulky steel scrap. The unprocessed steel scrap is sold as a by-product of the manufacturing operation to various firms involved in the recycling process.
The executive committee is currently evaluating whether to process the scrap into different grades and types of usable steel. Using various models of chip crushers, the scrap can be ground and compressed into either rough or fine scrap. The fine scrap would fetch a higher market price than the rough scrap. XYZ Limited has to decide whether to invest in the higher-cost chip crusher (HCC) to produce fine scrap or the lower-cost chip crusher (LCC) to produce rough scrap.
As a financial analyst of the company, you have gathered relevant purchase prices and operating costs of the two chip crushers from the supplier of the chip crushers and the marketing and production staff. The key estimates of financial data for the two machines are given below:
| LCC | HCC | |
| Purchase Price | $400,000 | $480,000 |
| Useful Life (years) | 4 | 6 |
| Depreciation (reducing balance method) | 40% p.a. | 30% p.a. |
| Salvage value at the end of useful life | $80,000 | $48,000 |
| Annual interest expense | $48,000 | $48,000 |
| Annual scrap revenue | $450,000 | $600,000 |
| Annual operating costs: | ||
| – Variable overheads | $50,000 | $150,000 |
| – Salaries | $80,000 | $110,000 |
| – Marketing | $45,000 | $60,000 |
The calculation for annual operating costs includes the following items:
- Variable overheads are direct operating expenses incurred in the production of the fine or rough scrap.
- Salaries represent the costs of employing two new machine operators at a salary of $40,000 per annum each. For the HCC machine, the company will only need to employ a new machine operator and the second, who earns $70,000 per annum, will be transferred from the axle assembly plant. The second operator from the main plant would otherwise have been made redundant with a redundancy payment of $50,000.
- The marketing cost is based on the standard allocation of the new investment towards group advertising expenses, which is 10% of annual revenue. It has been estimated that the additional group advertising required to promote the sales of fine or rough scrap is only $40,000 per year.
The accountant, Mr. Smith pointed out to you that the revenue figures do not take into consideration the scrap sales that XYZ would generate regardless of whether the company bought either machine. He has estimated that the current unprocessed scrap would generate a net income of $50,000 per year.
Production facilities for the steel scrap would be set up in an unused section of XYZ Limited main plant. The section of the plant where the steel scrap production would occur has been unused for several years and consequently had suffered some deterioration. Last year, as part of a routine facilities improvement program, XYZ Limited spent $80,000 to rehabilitate that section of the main plant. Mr. Smith believes this outlay, which has already been paid and expensed for tax purposes, should be charged to the steel scrap project. His contention is that if the rehabilitation had not taken place, the firm would have to spend $50,000 to make the site suitable for the steel scrap project. As the section of the plant has been rehabilitated, it could fetch a rental income of $40,000 per year.
The company’s after tax cost of capital is 15 percent per annum. Assume that the company is subject to 30% corporate tax and that the tax is paid at end of the same year (i.e. not the following year).
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