21S2 DIST
125.700 Assignment instruction
1. The due date for this assignment is September 26 (Sunday), 11.55pm. This assignment
weights 20% of your final grade. Late assignment is penalised 10% of the total score
each day.
2. Assignment includes 2 parts: Part 1 (capital budgeting) and Part 2 (cost of equity). Please
refer to following pages for details. To complete this assignment, you need to have
finished the readings and exercises up to week 8.
3. You will need to upload two files on Stream before due time: a typed Word document,
and an Excel file (Please download “Assignment template” from Stream. Rename it
“Assignment template_your student ID”).
21S2 DIST
Part 1: Clean Floor Inc.
Clean Floor Inc. has been developing a prototype of a useful, and hopefully, highly profitable
“unique” product. Last month, the design team unveiled a fully tested prototype of their
latest innovation of robot vacuum cleaner. Detailed information is provided below.
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The design team has spent $2 million in research and development. The testing and
development phases took almost 3 years and the final product passed all safety hazard
tests. This project of robot vacuum cleaner has a 10-year economic life.
The marketing department has spent $800,000 in marketing research. Survey of retailers
and customers, conducted by the marketing department, indicated that demand would
be potential, even the price was higher than a traditional vacuum cleaner.
Based on the data provided by the marketing department, the expected unit sales of the
robot vacuum cleaner are 25,000 next year. The unit sales are expected to growth at 1%,
as the growth rate of national population. Marketing department expects this innovative
cleaner will be sold at $1,000 per unit next year.
Based on the manufacturing department, the cost of equipment is $25 million.
Additional costs of shipping, handling, and installation are estimated at $5 million. It is
estimated that after the 10 years of economic life, the savage value will be nil.
In next year, manufacturing department expects fixed production costs (per year) are
$1,500,000 while variable production costs per unit are $500 per year.
Net working capital is estimated to be 20% of next year’s sales, and all net working
capital will be recovered at the end of the project.
The manufacturing will be done in an unused plant of the firm. It is expected that in next
year similar plant locations can be leased for $100,000 per month. Leasing fees are
expected to be reviewed every year, with growth rate at 2% per annum.
Clean Floor’s CEO has set a target hurdle rate of 25% for this project. On the other hand,
a financial analyst estimates a 20% discount rate given the riskiness of this type of
project.
Interest expenses on debt raised to fund the project were estimated to be $400,000 per
year.
Easy Life adopted a straight-line method for depreciation over the operating life.
The company’s tax rate was expected to remain constant at 30%. Expected inflation rate
is 3% per annum, which will affect sale price and production costs.
Requirements:
1. In Excel spreadsheet “Part 1 base case”:
A. Construct projected cash flows for year 0 to 10. Use Table 8.1 (step 1 and 2) on
textbook p.250 as template.
B. Calculate payback period, discounted payback period, NPV and IRR.
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C. Use Data Table to construct sensitivity analysis for each of the following variables:
unit price, variable production cost, and project’s discount rate. For each variable,
show the NPVs when percentage changes are 20%, 10%, 0%, -10%, and -20%.
2. In Excel spreadsheets “Breakeven 1-3”:
A. Copy the projected cash flows. Use Goal Seek to find financial break-even level of
unit price, variable production cost and project’s discount rate, respectively. For
each variable, conduct the break-even analysis in a new spreadsheet.
3. In Word:
A. Present findings of PP, DPP, NPV and IRR. Make your decision based on each one of
technique with brief explanation.
B. Present summary of findings of financial break-even analyses. In addition, calculate
accounting break-even level of units sold for the first year. Show your working (i.e.,
equation).
C. Make a final recommendation.
21S2 DIST
Part 2: Mainfreight
Estimate cost of equity for Mainfreight (NZSX: MFT).
Requirements:
In Excel spreadsheet “Part 2”, follow the step and complete all yellow cells.