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Assessment Task 3: Business Finance Task description Assume you are a manager in the Whizz Bang Corporation Ltd (WBC), a large organisation whose business is to manufacture and wholesale spare parts...

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Assessment Task 3: Business Finance
Task description 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. This assessment presents you with three hypothetical scenarios that you are required to respond to. You must address all three scenarios and incorporate your answers into a single cohesive report that would be suitable for submission 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 to support the request is provided as the staff member automatically presumes your approval. In the past, your predecessor had approved all such requests, without further information. Required Discuss this scenario, in particular describing what information you should require 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. Information related to the project is 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 additional expenses to head office, WBC has a policy of allocating a ‘head office’ charge of $200,000 a year to each major project. • Research for this project and its capability was conducted during the previous year at a cost of $300,000. It yielded valuable information. • The corporate tax rate is 30 per cent.
GSB003 Managing Financial Resources: Course Outline
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• 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.
Required 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 recommendation. 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. • Justification for 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 $ XXXXXXXXXXThe bank bills issued by WBC are ninety-day bills, with a face value of $100,000 and are currently priced at $97, XXXXXXXXXXThe 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. Required 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.
GSB003 Managing Financial Resources: Course Outline
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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 Finance readings.
Assessment Format: This assessment should be submitted in report format with an assessment cover sheet, title page, executive summary, table of contents, introduction, discussion of three scenarios,, conclusion, list of references and appendices (including workings and calculations in an excel spreadsheet).2000 plus calculation
Answered Same Day Mar 15, 2020

Solution

Sarah answered on Mar 26 2020
120 Votes
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Assignment Title
Student Name
Course Name
Instructor Name
Date
Executive Summary
Whizz Bang Corporation (WBC) is a large manufacturing organization and sells parts to heavy transport motor vehicle in wholesale. The company wants to replace their existing old worn-out equipment with the new equipment to meet the manufacturing requirement. There are various scenarios taken into consideration for the analysis. As per the first scenario, no information is furnished about the investment. Therefore, decisions cannot be made in this case as it can lead to destruction. Next scenario is where sufficient information related to the new assets, sales, costs, the source of capital and cost of capital are provided. But there is some information missing like their impact on the working capital of the company and the capabilities of the business in meeting the needs of the new asset. When new assets are purchased, it essential to perform a feasibility study based on the available resources and capabilities to ensure that the asset will create value and not trouble to the business. The last scenario is related to the WACC which is essential to determine the cost of capital for the project, but they ca
y information related to the short-term debt which pertains to working capital requirement and not capital (Cacciafesta, 2015). Therefore, detailed and relevant information is essential for making best decisions. Using capital budgeting techniques can always yield the best result for such capital investment decisions to the company.
TOC
Table of Contents
Introduction    4
Discussion    4
Scenario 1    4
Scenario 2    5
Scenario 3    8
Conclusion    9
Reference    10
Introduction
Whizz Bang Corporation (WBC) is a large manufacturing organization and sells parts to heavy transport motor vehicle in wholesale. It is a routine process in the business cycle that requires the organization to replace the old equipment and machinery to purchase new equipment and machinery for improving the efficiency and productivity. Three different scenarios are critical for analyzing before decision making. A capital budgeting decision should consider some critical variable to ensure that the decisions made by the company are value-adding and not causing financial loss and are any trouble to the business (Pruzhansky, 2013). The report aims at providing a detailed evaluation and direction to the management in capital budgeting decision making.
Discussion
The capital acquisition is inevitable to the business, and thorough analysis of critical factors are essential before making investment decisions (Schulte, 2012).
Scenario 1
As per the scenario 1, the team member is requesting an approval for the worn-out equipment to maintain the production effectiveness and outcome. In the manufacturing industry, replacement of worn-out machinery is inevitable and even upgrade in the equipment is essential to meet the growing demands of the market. The proposal indicates the urgency for the replacement of the asset in the company. The major drawback in this scenario is that the staff members presume about the approval as the replacement is essential for the manufacturing unit. Another problem with this scenario is that the staff is not having all sufficient information based on which analysis can be performed by the manager before decision making. It is not viable for the manager to make such approvals before analyzing crucial variables.
The information required is the cost of new equipment, the life of the equipment, productivity that is how much units they can produce, the various cost incu
ed by the equipment, sources of capital and cost of capital and the salvage value of the assets (Zambujal-Oliveira and Duque, 2013). These are the basic information that is essential to perform the analysis. The manager should be in a position to evaluate the return on investment from the new equipment purchases to ensure whether the selected equipment is worthy to invest or not. The capability of the equipment is essential to evaluate as it will indicate the earning potential of the equipment. The main aim of replacing the equipment is to meet the demands of the business. It is essential for the...
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