Assessment 4: Case Study 2 ACC91210 SP3 2019
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ACC91210 Finance for Managers (Online) Study Period 3, 2019
Assessment 4: Case Study 2
Due date: 12 June 2019, 11PM
This assignment has a 50% weighting in your overall mark for this unit and focuses on content from
Weeks 4, 5 and 6. The assignment will be marked out of 50. It consists of two main tasks and marks
will be allocated as indicated in the ru
ic for each task at the end of this document. Your total
assignment submission should not exceed 2000 words (excluding Task 2 appendix showing cash flow
details and an assignment reference list).
Task 1: Capital Structure and Payout Policy Analysis (20 marks total)
For this task, you are required to describe and evaluate the capital structure and payout policies of
your case study company (chosen for Case Study 1).
For each policy area, use the following
oad approach:
1. Describe the policy (which may or may not be explicit) based on cu
ent and historical data.
2. Evaluate the policy, drawing on theory and practical considerations covered in the unit and
applied to the company’s cu
ent characteristics and situation.
Your analysis will be mostly qualitative but some basic quantitative measures should be used in
describing the company’s policies.
Marks for this task will be awarded as per the Task 1 ru
ic (see below).
Task 2: Capital Budgeting Task (30 marks total)
This task is based on the case information below. The company and financial data are fictional1 but
the background context is not. Companies increasingly face challenges and opportunities to run more
environmentally and socially responsible businesses whilst growing value for shareholders.
Case background
OnePack Limited operates in the packaged food industry, selling mainly stocks, sauces, snacks, drink
powders and salad dressings. All its products are sold in plastic packaging and a significant proportion
in small multi-layer sachets (or pouches)2 in Asian countries.
Managers at OnePack are acutely aware of the increase in world plastic production and the
environmental impact of plastic waste ending up in landfills, rivers and oceans. For example,
1 UniLever and its research and development in the area of multi-layer sachet recycling provides the inspiration for this case
ut all facts related to the financial analysis are fictional.
2 While not necessary for attempting this case study, you will better understand the plastic packaging in this case context if
you go to https:
www.plasticpackagingfacts.org
log/multi-layer-pouch-packaging-a-sustainable-story-animated/ and watch
the video on multilayer plastic pouches. Although many improvements to this packaging have been made, as pointed out in
the video, there remains much to do in reducing the impacts of waste pouches on the environment.
https:
www.plasticpackagingfacts.org
log/multi-layer-pouch-packaging-a-sustainable-story-animated
Assessment 4: Case Study 2 ACC91210 SP3 2019
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esearchers3 estimate that 8 million metric tons of plastic entered the ocean in 2010 and this annual
amount is predicted to more than double by 2025 with major increases in South Asia.
To help develop a closed-loop system related to the company’s products, OnePack has invested $25
million in soft plastic recycling research, development and pilot testing. The outcome is a new and
efficient method for recycling sachet waste. In fact, their recycling method is more energy efficient
than producing virgin sachet plastic, reducing energy usage by 83%. The output plastic is of such high
quality it can be used in food grade packaging applications. Cu
ently, no other recycling method in
the market can achieve this.
The company now faces a decision: should it build a commercial scale plant and produce recycled
sachet plastic for use in packaging its own products? The CEO has asked you to undertake a financial
analysis of the options and present your recommendations in a memo.
Financial projections for recycling sachet waste
Moving to full recycling production requires an upfront investment in plant and equipment of $30
million, which will be depreciated to a zero book value on a straight-line basis over 6 years. Financing
for the plant and equipment will be via a new debt issue, resulting in interest costs of $1.2 million
payable at the end of each year. The plant will provide sufficient capacity to meet the company’s
forecast plastic packaging needs over the period of its life. After this, it is expected that the plant will
e updated using new technology but some of the older equipment will be sold to metal recyclers for
$1.5 million.
The plan is to replace use of virgin plastic in packaging with the new recycling plant’s output. The
upcoming year forecast of total variable plastic packaging costs based on virgin plastic is $27 million
and this is expected to grow by 2% per year after that. Replacing externally-sourced virgin plastic with
internally-produced recycled plastic is expected to result in some reduced variable packaging costs.
First, the energy efficiency of the recycling method will reduce costs compared to virgin plastic
production and this is estimated to decrease the company’s annual forecast packaging costs by 10%.
Second, a virgin plastic supplier margin equivalent to 8% of annual forecast packaging costs will be
avoided but this benefit is expected to be offset by a new cost associated with paying a partner to
supply plastic waste raw material for recycling.
In addition to benefits related to cost savings, the company’s sales and marketing executives have
argued that sales revenue of the company’s products will increase due to consumer demand for
environmentally responsible products. Excluding this potential benefit, the company’s forecast sales
evenue for the coming year is $440 million and this is expected to grow by 2% each year after that.
The executives have estimated that with an additional $13 million in marketing costs in the first year
of the project to inform the public of the company’s recycled packaging, annual sales revenue will be
2.5% higher than existing forecasts for the life of the project.
An additional $4 million annually in administrative and general expenses directly related to the project
(excluding depreciation) will be incu
ed. Furthermore, an upfront additional investment will be
equired in net working capital. This will be equal to 1% of the total first year sales revenue forecast
3 Estimates from Jambeck, J.R., Andrady, A., Geyer, R., Narayan, R., Pe
yman, M., Siegler, T., Wilcox, C., Lavender Law,
K XXXXXXXXXXPlastic waste inputs from land into the ocean, Science, 347, p XXXXXXXXXX.
Assessment 4: Case Study 2 ACC91210 SP3 2019
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under the project assumptions and will be fully recovered in the last year of the project. Apart from
these changes, the general consensus of the champions of the project is that all other costs will be
equivalent to existing forecasts.
Other case information:
OnePack has a 9% weighted average cost of capital and is subject to a 30% tax rate on its income.
Required:
Prepare a financial analysis of the proposed project and present it to OnePack’s CEO in the form of a
memo.
In the memo,
iefly explain and justify your chosen methods, inputs and any assumptions made,
summarise your findings and present recommendations on the proposed project. Ensure you not only
address base case cash flows but also analyse potential uncertainty. Recommendations should
address the decision to be made, along with any further follow up or other matters the company
should consider prior to making a final decision.
Include an appendix to the memo that includes details of your base case figures. Within the memo
ody, you may provide tables and figures that assist decision makers understand your methods,
findings and their implications for decision making but ensure the tables and figures are discussed
and/or explained.
Assessment 4: Case Study 2 ACC91210 SP3 2019
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TASK 1 MARKING
CRITERIA Excellent Very Good Good Satisfactory Poor
Description of
capital structure
and payout
policies (7 marks)
The company’s capital structure and
payout policies are succinctly and
well described, payout policy in
terms of level, form and stability. The
description is directly supported by
elevant cu
ent and historical
qualitative information (e.g. quotes
from company sources) and
quantitative measures that are
clearly and concisely presented
(tables, charts) and co
ectly
interpreted. (7 marks)
The company’s capital structure
and payout policies are well
described, payout policy in terms
of level, form and stability. The
description is mostly supported
y relevant cu
ent and historical
qualitative information and
quantitative measures that are
clearly and concisely presented
(tables, charts) and co
ectly
interpreted. (6 marks)
The company’s capital
structure and payout
policies are described,
payout policy in terms of
at least two of level, form
and stability. The
description is supported
y some relevant
qualitative information
and quantitative measures
that are mostly co
ectly
interpreted. (5 marks)
The company’s capital structure
and payout policies are described,
payout policy in terms of one of
level, form and stability, supported
y some relevant qualitative
information and quantitative
measures that are mostly co
ectly
interpreted. If more than one
aspect of payout policy is
described, it is mostly inco
ectly
interpreted or without adequate
supporting data (4 marks)
The description is
missing or extremely
limited or
unsupported by
elevant and
accurate data or
contains mostly
inco
ect
interpretations. (0 to
3 marks)
Evaluation of
capital structure
policy (6.5 marks)
Several relevant factors in setting a
target capital structure have been
co
ectly applied to the company's
cu
ent characteristics and situation
to make appropriate and well
explained judgements on its capital