Assessment Task 3: Business Finance
Word Length: 2,000 words plus calculations
Value: 30% of overall grade
Format: Written report
Assume you are a manager in the Whizz Bang Corporation Ltd (WBC), a large organisation
whose business is to manufacture and wholesale spare parts for heavy transport motor
vehicles. You are presented with three scenarios that you are required to address and
respond to. You must address all three scenarios and incorporate your answers into a
single cohesive report that is addressed to senior management.
Scenario 1: Capital Acquisitions
One of your team members provides you with a request seeking your approval to replace
an expensive worn-out piece of equipment. As it is a replacement, very few details are
provided and it is evident that the staff member automatically presumes your approval. In
the past, your predecessor had approved all such requests.
Discuss this scenario, in particular describing what information you should demand to know
before you approve the release of capital funds for such a request, and why you would
require that information.
Weighting: 25 marks of the total 100.
Scenario 2: Project Proposal
You have identified a potential opportunity for WBC, which involves undertaking a project
that will have a ten-year life. The project requires an initial purchase of equipment and
furniture totalling $4,500,000, plus ancillary programming capability and machinery
costing $1,500,000. The equipment and furniture will depreciate and have a salvage value
of $500,000 at the end of the project’s life, and the programing machinery will have nil
salvage value at the end of the project’s life. Depreciation is calculated on a straight-line
basis over five years.
The operating results for the project are estimated as follows:
Sales will be $3,050,000, $4,000,000 and $5,000,000 respectively in each of the first
three years of operation, expected to grow at 10 per cent per annum for a further four
years thereafter, and then settle to a growth of 5 per cent per annum indefinitely
thereafter. In the event of not undertaking this project, all of this income would be lost.
Variable costs associated with the project will be 65 per cent of sales.
Fixed costs associated with the project will be $400,000 in the first year and expected to
grow at 5 per cent per annum thereafter.
Even though this project will not add any additional cash flows expenses to head office,
WBC has a policy of allocating a charge of $200,000 a year for head office and
administration costs for each substantial project.
Research about the best technology for this project and its capability was conducted
during the previous year at a cost of $300,000. It yielded valuable information.
The following information is also provided:
The corporate tax rate is 30 per cent.
Financiers of this type and risk in this industry are presently requiring a rate of 12 per cent
after corporate tax.
In order to undertake this project, WBC is considering various financing options. One
option is to borrowing $5,000,000 at 7 per cent per annum. This loan will be paid off in 10
equal annual instalments.
Evaluate this project, and provide a report to WBC management discussing whether or
not you recommend it should undertake the project, providing a full explanation of your
As support for your recommendation ensure your answer includes the following:
Calculations of the NPV, IRR, and the payback for the project and an analysis of the results.
Justify the correct discount rate to be used in evaluating the project.
Your assessment of the advantages and disadvantages of each methodology (NPV, IRR
and payback), and which you therefore recommend is applied to evaluate this project.
Details of any other (financial and non-financial) matters you would consider before
making a recommendation in respect of this project.
Weighting: 40 marks of the total 100.
Scenario 3: Project Financing
WBC is currently financed using debt and equity with a targeted debt to equity ratio of one
(D/E = 1). Its debt financing is from three sources, overdraft, bank bills and debentures, with
the ratio of overdraft to bank bills to debentures of 1:2:3. Its equity is ordinary shares. These
ratios represent the long-term capital structure target for WBC.
The debenture pays an annual coupon of 12 per cent per annum on its $1,000 face value.
The remaining term of the debenture is six years. The debenture is currently priced
The bank bills issued by WBC are ninety-day bills, with a face value of $100,000 and are
currently priced at $97,593.58.
The bank overdraft rate is 1 per cent per annum above the bank bill rate.
The ordinary shares sell for $8.00. The projected dividend for year one is $1.10. Dividends
are expected to grow at 6 per cent per annum indefinitely.
Calculate the Weighted Average Cost of Capital (WACC) for WBC, assuming a tax rate of
30 per cent.
Hint: this requires a calculation of the effective annual cost for each source of finance.
Discuss whether the WACC could be used in the above project evaluation, and if so how.
Include a discussion of any restrictions that apply to the use of WACC?
Weighting: 35 marks of the total 100.
Evidence of Reading and Research
You need to provide evidence of researching additional relevant peer reviewed
academic articles. These articles are in addition to those provided in the Managing
Report format including:
Report format including:
- Assessment Cover Sheet
- Title Page
- Executive Summary
- Table of Contents
- The Body
- List of References