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ASSIGNMENT COVER SHEET
Name:
Caleb Dean
Student ID 20600901
(If the given name by which your tutor knows you, differs from your name on University records, please indicate BOTH
names)
Unit: FNCE2000 Introduction to Finance Principles
Tutor: Mamiza Haq
Day & Time of Tutorial:
Friday 1:00pm
Due date: To be submitted by 5pm on Tuesday 24th of May 2022
IMPORTANT INSTRUCTIONS:
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Show all working to demonstrate you have understood how to solve each problem.
If you use a financial calculator, state the sequence of steps to solve the problem.
Please present your answers in at least 4 non-zero decimal places. i.e., 0.00001234 or
0.1234.
Students are to submit their assignments onto Blackboard. The assignment must be typed
(Word, Excel or PDF).
Answer must be legible. If the marker cannot follow or read your answers, marks cannot be
rewarded.
Answer all sections.
Your assignment should meet the following requirements
 A copy of the assignment has been retained by me
 Declaration below is complete
Declaration
Except where I have indicated, the work I am submitting in this assignment is my own work
and has not been submitted for assessment in another Unit or course. I warrant that any
computer files submitted as part of this assignment have been checked for viruses and reported
clean.
__Càleb Dean__
(Signature of student)
All forms of plagiarism, cheating and unauthorised collusion are regarded seriously by the University and could
result in penalties including failure in the course and possible exclusion from the University. If you are in
doubt, please contact your lecturer, Unit Controller, or your Course Coordinator.
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Question 1
(Total 14 marks)
As a senior analyst for the company you have been asked to evaluate a new IT
software project. The company has just paid a consulting firm $100,000 for a test
marketing analysis. After looking at the project plan, you anticipate that the project will
need to acquire computer hardware for a cost of $450,000. The Australian Taxation
Office rules allow an effective life for the computer hardware of five years. The
equipment can be depreciated on a straight-line (prime cost) basis and there is no
expected salvage value after the five years.
Your company does not have any available space where the project can be located
for five years and you anticipate to rent the required office space it would cost $65,000
per year for the life of the project. You expect that the project will need to hire 3 new
software specialists at $50,000 (each specialist) per year (start in year 1) for the full
five years to work on the software.
The project will use a van currently owned by the company. Although the van is not
currently being used by the company, it can be rented out for $15,000 per year for five
years. The book value of the van is $20,000. The van is being depreciated straightline (with five years remaining for depreciation) and is expected to be worthless after
the five years.
Expected annual marketing and selling costs will be incurred during the life of the
project (5 years), with the first year expecting to be $250,000. The produced software
is expected to sell at $85 per unit while the cost to produce each unit is $40. You
expect that 10,000 units will be sold in the first year and the number of units sold will
increase by 25% a year for the remaining four years. The project will need working
capital of $50 000 to commence the business (in year 0) and the investment in working
capital is to be completely recovered by the end of the project’s life (in year 5). The
company tax rate is 30%, and the discount rate is 10.5%.
Based on the information presented above, answer the following questions (1) – (3).
1.
In evaluating the new IT software project, is the cost of $100,000 spent on
marketing analysis relevant? Explain your answer(s).
( 1 mark)
When evaluating the new IT software project, the $100,000 spent on the marketing
analysis should not be included in the decision making of acquiring a new project. This
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is because the project will incur regardless if the new project is adopted or scrapped.
Furthermore the $100,000 was a one-time cost for the analysis of the overall project,
not specific to the marketing analysis.
2.
Calculate the incremental free cash flow during the project’s life (starting from
year 0 to year 5). Show workings.
( 6
marks)
Working Out:
Units Sold: 10,000 Units with a 25% increase every year 10,000 x 0.25 = 2500 (10000
+ 2500 = 12500)
Net Operating Profits: Units x Profits Per Unit
Per Unit Sold 85 – 40 (Production cost) = Profit 45
45 x 10,000
Hardware Cost: $450,000 over 5 Years
Software Specialists Salary: $50,000 per annual salary x 3 Salaries
$50,000 x 3 = $150,000 over 5 years
Office Rent = $65000 Per Year
Depreciation of Van = $20000/5 = $4000 Per Year
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OC – Rent of Van = $15,000 Per Year
Annual Marketing and Selling Costs = $250,000 Per Year
Overall Operating Income = Net Operating Profits – Expenses
Tax = 30% of Overall Operating Income
Net Operating Income After Tax = Overall Operating Income – Tax
Overall Depreciation = $94,000 Per Year
Operating Cash Flows = Net Profit After Tax + Overall Depreciation
Incremental Cash Flow = Operating Cash Flows + Year 5 moving Capital
3.
Calculate the NPV and IRR of the project. Should the project be accepted?
Show workings and explain your answer(s).
( 7 marks)
Working Out:
Incremental Cash Flow: Inputted from Operating Cash Flows in Question 2
Discounting Factor = 10.5%
Present Value (NPV) = Incremental Cash Flow * Discounting Factor (Annually)
Cumulative Cash Flows = Incremental Cash Flow – Present Value (NPV)
Pay Back Period = (3 Years + (222462.5/(84971.88+222462.5)))
NPV = Cash Flow / (1 + I)t – The Initial Investment
IRR = (230099.91/(230099.91+51376.384) x (25-10.5)
Conclusion: After calculating and looking at the statistical analytics its been
determined that the project should be accepted. This is because the project has a
positive NPV and the IRR sits at 22, which is considered to a good IRR.
Question 2
(Total: 4 marks)
A. DZs Ltd has a current dividend growth rate of 10% per annum. It is expected that
this rate can only be maintained for the next 2 years, from which time it is expected to
be 6% per annum and remain at that level indefinitely. The investors’ required rate of
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return is 25%. The latest dividend per share was $0.60 and was paid yesterday. What
is the value of DZs’s shares?
(2 marks)
DZ’s Shares Value = $12
Current Dividend = $0.60
Growth Rate = 10% for 2 years, than 6% after
Required rate of return = 25%
D = $0.60
g = 0.1
r = 0.25
P = D (1+ g) / (r-g)
P = $0.60(1+0.1) / (0.25 – 0.1)
P = 12
B. Titan Ltd is considering listing on the local stock exchange. Their industry
classification will be “Transport and Storage”. The average price earnings ratio for this
sector is 16. You are reviewing the company and plan to calculate an expected price
earnings ratio using expected price and expected earnings. The company’s expected
earnings per share is $3.10 and they expect to maintain a dividend payout ratio of
40%. Assume the expected price for Titan is $12.50. What is the expected P/E ratio?
And what conclusion can you draw from it?
(2 marks)
Looking at Titans Expected P/e Ratio, it comes out to be 20. This means that Titan
Ltd can expect to have higher earnings from their current share price. This can be
expected because the expected share price is sitting at $3.10 and they expect to
continue their dividend payouts of 40%. Then looking at the expected share from for
the company, its sitting at $12.50, which indicated that their share is expected to be
trading at a price below the average price earnings ratio. The expected P/E ratio is
mildly high, therefor this suggests that Titan company can expect to have higher
levels of earnings in the future from the market.
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Question 3
(Total 7 marks)
A. Cash flows for Go-Van X and Go-Van Y are provided below. Assume the required
rate of return for both machines is 12%.
(3
marks)
Year
0
1
2
NPV
Go-Van X
Go-Van Y
-$800
-$800
$350
$375
$350
$395
?
?
Which machine will you choose if they are considered mutually exclusive?
I would choose Go-Van Y because the NPV is higher than the NPV of Go-Van X
B. Bay Properties is considering starting a commercial real estate division. It has
prepared the following four-year forecast of free cash flows for this division:
(4 marks)
Year 1
Year 2
Year 3
Year 4
Free cash flow −$185,000 +$12,000 +$99,000 +$240,000
Assume cash flows after year 4 will grow at 3% per year, forever. If the cost of capital
for this division is 14%.
I.
What is the continuation value in year 4 for cash flows after year 4?
Continuation value:
240,000 x (1 +0.03) / (0.14 – 0.03)
= 2247272.727
II.
What is the value today of this division?
Valuation of division = Sum of PV cash Flow
-162,282 + 9234 + 66,825 + 1472714.343
= 1386491.343
Value today of this division = 1386491.343
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THIS PAGE IS LEFT BLANK PAGE FOR YOUR WORKINGS
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