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i) Provide all the required information and follow the instructions (e.g. word/page count). Answer the question directly and relevantly.

Assignment Task: You are required to produce a 1,400-word report in Word format, that will contain your responses to ALL THE THREE QUESTIONS listed below.

 

1,400 WORDS MAXIMUM INCLUDEING TABLES AND GRAPHS.

 

Question 1

Foresightful plc is currently considering investing in either of two competing projects that will allow the firm to expand its production capacity in order to meet the growing demand for its product.  For each project the initial investment in new capital equipment will be required immediately.  It is expected that the new equipment will be sold for scrap at the end of Year Three. The projects are expected to generate revenues and incur operating costs starting from next year (i.e. from Year One). Variable costs are expected to be 50 per cent of annual revenues. The table below shows the estimated annual direct overheads and annual revenues associated with the two projects, over their relevant three-year horizons.

 

Project A (£000)

Project B (£000)

Initial Investment (immediate outlay incurred in Year Zero)

(130)

(60)

Expected Annual Revenues  from Sales

Year 1

240

130

Year 2

200

70

Year 3

50

30

Expected Annual Direct Overheads

Year 1

30

15

Year 2

30

15

Year 3

20

5

Estimated resale value of new equipment at the end of Year 3

10

10

 

Direct overhead costs are incremental and arise as a result of undertaking the projects.  All cash flow estimates are stated in money terms and the general inflation rate is anticipated to be 3 per cent.  The company employs the straight-line method of depreciation when calculating accounting profit.  The real cost of capital to the company is 6 per cent.

You may regard all receipts and payments occurring at the end of the year to which they relate. Ignore taxation.

Required:

(i)    Calculate for each project:

1)    the net present value;

2)    the internal rate of return;

3)    the payback period.

(ii)   On the basis of your results in part (i), advise the company’s management which is the best project, explaining to them the reasoning and justification for your investment advice.

You must show computations and workings and state assumptions you have made clearly and neatly.

 

                        [ 35 marks ]

Question 2

New Gadgets Ltd has spent £50,000 researching the prospects for a new range of products. The company’s directors regard this capital project as risky because it will require complete modernization of a factory that will be used for manufacturing of the new product range. An initial investment of £100,000 in capital equipment will be followed by three years with the following most likely estimates of annual cash flows:

 

 

£

£

Annual sales (volume of  120,000 multiplied by estimated sales price of £2.5)

 

 

300,000

 

 

 

Annual costs

 

 

Labour

90,000

 

Materials

125,000

 

Other

40,000

 

 

255,000

(255,000)

Operating cash flows before depreciation and tax

45,000

 

The equipment will have no second-hand value at the end of the three-year economic life of the project. The company’s cost of capital is 9 per cent.

 

To ensure that all investments create shareholder value, the company use discounted cash flow methods in their investment appraisal process. The financial manager, analyzing the proposal, is aware that the capital investment committee of the company will want to know the extent to which (i) annual sales volume, (ii) sales price and (iii) the cost of capital can change before the decision to accept the project switches to a decision to reject.

 

Assume that all cash flows arise at year ends. Ignore taxation and inflation.

Required:

(a)  Assess the project using net present value (NPV) on the basis of the above estimates.

(b)  On the basis of the net present value, should the business go ahead with the project?

(c)  Give the required sensitivity analysis of the financial viability of the new project to variations in: (i) annual sales volume and (ii) the cost of capital. 

(d)  Briefly discuss the usefulness of the sensitivity analysis to the management team in making their decision, indicating any additional analysis that might be required.

You must show computations and workings and state assumptions you have made clearly and neatly.

            [ 35 marks ]

 

Question 3

 

The table below provides the end-of-year share prices (in pence) for ASTRAZENECA PLC and TESCO PLC, and the end-of-year values for the FTSE 100 Index, which is a proxy for the market portfolio M.

YEAR

ASTRAZENECA

TESCO

Market Portfolio

2000

1485.5

154.3

6174.7

2001

1650.3

153.4

5218.3

2002

1061.7

110.9

4009.5

2003

1370.3

164.7

4510.2

2004

1067.2

218.6

4847.0

2005

1496.6

231.1

5681.5

2006

1605.6

312.0

6310.9

2007

1221.6

318.0

6416.7

2008

1628.8

280.9

4561.8

2009

1869.7

345.5

5500.3

2010

2046.4

337.2

6013.9

2011

2184.3

277.6

5668.5

2012

2320.2

324.1

6089.8

2013

3109.9

303.5

6717.9

2014

3986.3

221.7

6547.8

2015

3932.5

171.1

6093.4

2016

3842.5

192.0

7177.9

2017

4697.1

207.3

7648.1

Source: Yahoo Finance.

Required:

(a)  Calculate the systematic risk     , the non-systematic risk () and the total risk  of the stocks of ASTRAZENECA and TESCO. 

(b)  Which company’s returns are better explained by the market’s returns?

(c)  Suppose the market is in equilibrium. Assuming the risk-free interest rate of 1.25% per annum calculate the expected equilibrium risk-premium for each of the two stocks.  Comment on the results.

You must show computations and workings and state assumptions you have made clearly and neatly.

 

            [ 30 marks ]

Allocation of Available Marks

Section/element

Allocated Available Marks

1)    Question 1

35 marks

2)    Question 2

35 marks

3)    Question 3

30 marks

 

 

Non-submission or work submitted after the above deadline will be given 0 (zero) %.

Submission Requirements:

Please use the following page layout for the report:

Times New Roman font size 12, single spaced, with margins 1” (or 2.5 cm) 1 inch margins (left, right, top and bottom).

Please do not forget to provide the actual word count at the end of the report.

 

 

General points:

i)              Provide all the required information and follow the instructions (e.g. word/page count).  Answer the question directly and relevantly.

ii)             Write in proper sentences and paragraphs and avoid a ‘shopping list’ approach. Keep the style formal and remember to draw conclusions. Use the spelling and grammar check in Word. Poor grammar and spelling is unprofessional and unacceptable at Master’s level. As a result, make sure that you proof read your work and edit it properly.   

iii)            Do not copy the work of others or allow others to copy your work. Plagiarism is cheating and will be penalised

 

 

END OF ASSIGNMENT PAPER

 


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