Answer Assignment Name Tutor Signature Year 01

Answerassignmentnamesidtutorial Time Daytutorsignatureyear01234

Answer Assignment Name: SID: Tutorial Time & Day: Tutor: Signature: Year Cash flows at the start Machine - 18,000,000 Delivery - 2,000,000 Installation - 160,000 Install tax Deduction 48,000 Sell Old Machone 700,000 Tax Savings Loss on sale 30,000 marketing - 900,000 marketing Tax Benefit 270,000 Working Capital - 600,000 Total cash flows at the start (20,612,000.0) Cash flows over life Reduced Sales of Challenger - 2,500,500,500,500,500,500,500,500,500 Revenue 4,000,300,615,945,945,945,945,945,945,945,750 Electricity - 300,000 Material Costs 104,000 Old Depreciation 200,000 New Depreciation - 2,000,000,000,000,000,000,000,000,000,000,000,000 marketing - 900,000,000 Tax 418,925 Sum - 977,133,210,210,210,210,210,210,560,825 add back depreciation 1,800,800,800,800,000,000,000,000,000,000,000,000 Working Capital ,000.,000.,000.,250.00 1,041,862.50 1,041,862.50 1,041,862.50 1,041,862.50 1,041,862.50 1,041,862.50 Change 600,000.,000.,000.,250.,612.

Total cash flows over the life 522,177,385,883,210,210,210,210,210,560,825 Cash flows at the end Salvage Value 6,000,000 Tax Benefit - 1,800,000 Working Capital At end 1,041,863 Total cash flows at end of project 5,241, Summary and NPV calculations Cash flows At start (20,612,000.0) Over the life 522,800.0 2,177,800.0 2,385,550.0 2,883,687.5 3,210,825.0 3,210,825.0 3,210,825.0 3,210,825.0 3,210,825.0 8,802,687.5 Payback -20,089,200.,911,400.,525,850.,642,162.5 -9,431,337.5 -6,220,512.5 -3,009,687.5 0.9374 Required rate of return 10.7% (20,612,000.,160.76 1,776,342.13 1,757,322.45 1,918,516.06 1,929,248.59 1,742,378.49 1,573,608.94 1,421,186.67 1,283,528.26 3,178,032.94 Total NPV - 3,559,674.7 Accept/Reject Project Reject Payback Period 7.9374 Internal rate of return 7.4% &R&P Sheet Sydney Harbour Fuel Sydney Harbour Fuel Note that the figures below have the sign (+ or -) as is given in the Net Income or CFFA equations. So for example, CapEx: new vessels is negative not because we sold the boats, we bought them. It's made negative since CapEx is subtracted from CFFA. This means that total CFFA can simply be summed rather than subtracted. Doing it this way is fine, but you can also take the sign of the number into account in the total which is fine too. For example, you could have a positive CapEx, and subtract that number from total CFFA. Given the size of the project it is expected that Viking Boats will borrow $20,000,000 at a government subsidised interest rate of 3.5%. Interest expense is tax deductible of course. Marketing costs are expected to be $900,000 in years 0 to 3 and $500,000 in years 4 to 9. Due to the increased production there will be an increase in the working capital requirements for the time the new machine is in use. This increase is expected to be 15% of the following year's increase in revenues.

Assume that all amounts above are paid at the end of the year. The after-tax WACC used for projects of similar risk is 7.5%, given as a real rate. Treasury bonds yield around 4.5% p.a and pay semi-annual coupons of 8% pa. The firm's bonds pay semi-annual coupons of 5% pa and trade at a yield of 6% pa. The ASX200 trades at a 7% p.a. premium. All of the above rates are nominal rates except for the after-tax WACC, which is a real rate. The company tax rate is 30%. The firm maintains a constant debt to equity ratio of 40%. Inflation is expected to stay at 3% pa. All of the cash flows given are nominal. You are required to submit the following; 1. One page readable spreadsheet downloaded from iLearn clearly showing the NPV, Required Rate of Return, Payback Period and Internal Rate of Return of the project and all other calculations that are used to support your decisions. (20 marks) Note: Questions about the assignment can only be asked via the discussion board in iLearn. Tutors and lecturers will not answer student questions as they relate to the assignment. Only one page should be submitted to BESS before the due date and time. Do not submit using more than one page and/or plastic sheets etc.

Paper For Above instruction

Viking Boats Pty Ltd, under the leadership of Bob Bradley, is contemplating a significant investment in developing a hybrid luxury boat that is environmentally friendly and capable of being powered by both diesel and electricity. This project exemplifies a strategic move towards sustainable innovation, aligning with global trends towards pollution reduction and climate change mitigation. Evaluating such a capital investment requires a comprehensive financial analysis, primarily focusing on the Net Present Value (NPV), Internal Rate of Return (IRR), payback period, and other relevant financial metrics.

The initial investment encompasses the procurement of specialized machinery essential for engine production, estimated at $18 million, alongside additional costs for delivery ($2 million) and installation ($160,000). The installation expense is immediately tax-deductible, providing an initial tax shield. Moreover, Viking has incurred a research expense of $200,000, which is also tax-deductible. According to tax regulations, the machinery depreciation will be spread evenly over ten years on a straight-line basis, despite the accountant’s suggestion of a 15-year depreciation period for internal management purposes. The project also involves disposing of an older machine, valued at a sale price of $700,000, with a book value of $4 million, leading to a taxable gain and associated tax obligations.

Forecasted cash flows over the project's life must include revenues from new boat sales, cost adjustments, increased marketing efforts, and changes in working capital. Revenue projections suggest year-one sales of $4 million, escalating to $6 million in year two, with subsequent growth of 5% annually until year five, after which revenues stabilize. Cost elements comprise electricity costs, which increase over time; material costs, which decrease due to efficiencies; and marketing expenses, which vary over the years. Additionally, operational costs such as wages for shark protection services, valued at $10,000 annually, must be incorporated. Tax effects on income and depreciation will significantly influence the cash flow computations.

Debt financing is assumed at $20 million with a subsidized interest rate, and interest expense is tax-deductible, further impacting net cash flows. The project’s cost of capital, measured by a real WACC of 7.5%, is used for discounting cash flows, considering the inflation rate of 3% and the nominal nature of the cash flows. The valuation aims to determine whether the project’s discounted cash flows yield a positive NPV, justifying acceptance based on financial criteria such as a payback period under the management’s threshold and IRR exceeding the required rate of return.

In conclusion, the detailed financial evaluation involves consolidating cash flow forecasts, calculating adjustments for taxes and depreciation, discounting at the appropriate rate, and interpreting the resulting NPV and IRR. Based on the analysis, Viking Boats can make an informed decision on whether to proceed with this innovative project, balancing environmental benefits with financial viability. The simultaneous consideration of project risk, strategic alignment, and market conditions underscores the comprehensive nature of capital budgeting decisions in modern manufacturing firms.

References

  • Brealey, R., Myers, S., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2021). Corporate Finance (13th Edition). McGraw-Hill Education.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley.
  • Higgins, R. C. (2018). Analysis for Financial Management (11th ed.). McGraw-Hill Education.
  • Brake, K. (2017). Financial Management for Non-Financial Managers. Routledge.
  • Guerard, J. B. (2019). From Risk to Opportunity: How Vulnerability and Resilience Can Help Organizations Thrive. Routledge.
  • Investopedia. (2023). Weighted Average Cost of Capital (WACC). https://www.investopedia.com/terms/w/wacc.asp
  • Australian Securities Exchange. (2023). Market data and bond yields. https://www.asx.com.au
  • Australian Taxation Office. (2023). Depreciation and amortization rules. https://www.ato.gov.au
  • OECD. (2022). Environmental policies and corporate sustainability. OECD Publishing.

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