Case study 1
You are in the final stage of the selection process for the job of assistant financial analyst at the Antipodes Mineral Resources company (AMR). This involves a test of your understanding of basic financial concepts. You are given the following memo and asked to respond to the questions. Whether or not you are offered a position at the company will depend on the quality of your responses.
To: Applicants for the position of assistant financial analyst
From: K. Abbott-Gill, CFO, Antipodes Mineral Resources Co. (AMR)
Re: A test of your understanding of basic financial concepts
Please respond in writing to the following questions:
1- What types of investment projects would you expect to find in a minerals company? (at least 3 types of investment projects)
2- You will be working in the CFO’s office if you obtain this job. What activities do you expect are undertaken in this office? (at least 3 activities)
3- AMR is a public company, listed on the stock exchange. How does this fact have a bearing on the goal we should bear in mind when managing our finances? (at least 3 explanations)
4- Does or should AMR have any other accountabilities apart from responsibilities to the firm’s owners? (at least 3 types of accountabilities)
Case study 2
RWE Enterprises, Inc. (RWE) is a small manufacturing firm located in the hills just outside Adelaide, South Australia. The firm is engaged in the manufacture and sale of feed supplements used by cattle raisers. The product has a molasses base but is supplemented with minerals and vitamins that are generally thought to be essential to the health and growth of beef cattle. The final product is put in 50 kg or 90 kg tubs that are then made available for the cattle to lick as desired. The material in the tub becomes very hard, which limits the animals consumption.
The firm has been running a single production line for the past five years and is considering the addition of a new line. The addition would expand the firm’s capacity by almost 120% since the new equipment requires a shorter down time between batches. After each production run, the boiler used to prepare the molasses for the addition of minerals and vitamins must be heated to 85oC and then must be cooled down before beginning the next batch. The total production run entails about four hours and the cool-down period is two hours (during which time the whole process comes to a halt). Using two production lines would increase the overall efficiency of the operation since workers from the line that is cooling down could be moved to the other line to support the ‘canning’ process involved in filling the feed tubs.
The second production line equipment would cost $3 million to purchase and install and would have an estimated life of 10 years at which time it could be sold for an estimated after-tax scrap value of $200,000. Furthermore, at the end of five years the production line would have to be refurbished at an estimated cost of $2 million. RWE’s management estimates that the new production line would add $700,000 per year in after-tax cash flow to the firm. The 10-year cash flows for the line are as follows:
Year Cash flow
- a) If RWE uses a 10% discount rate to evaluate investments of this type, what is the net percent value of the project? What does this NPV indicate about the potential value RWE might create by purchasing the new production line? (formula and timeline)
- b) Calculate the payback and discounted payback for the proposed investment. Interpret your findings. (formula and timeline)