You are required to complete all four parts of this assignment. The marks available for each part are identified within each part. There are a total of 100 marks.

There is no word count limit for Assignment.

How to present your assignment.

You need to submit one Word document and one Excel file.

The Excel workings for each answer should be on clearly-labelled, separate worksheets (not a separate file).

There is no need for a management style of report or even a contents page. Keep your answers clearly separated and numbered parts 1 to 4. There is no need for formal introductions or conclusions for each question. Do not repeat the question. Also, keep each sub part of the questions clearly separated and numbered.

Your Word document should ‘drive’ your submission. Each question and sub-part should be included in the Word document, either answered (if a discursive question) or cross-referenced to the relevant part of the Excel file (if a quantitative question). For example, your answer to one question might be ‘Q7 c – see attached Excel file, tab ‘7c’’.

Part 1 (10 marks)

Andrewsmba is a fictious commodity. For the purposes of this question assume that it is used in many manufacturing processes. The following news items have been seen (in early 2021, during a Covid lockdown):

• a.It would seem that vaccines developed for Covid are proving useful in protecting against the virus and for reducing the spread of infection;
• b.Canada is a major producer of Andrewsmba, currently supplying about 15% of the world’s stock. The government has decided to introduce stringent new environment regulations which are likely to mean less production in the future;
• c.The global producers of Andrewsmba have formed an organisation, OOEC, for setting production levels, along the lines of OPEC. Recently OOEC has decided to reduce output levels across the board by 5%;
• d.Andrewsmba is priced in US dollars. Forecasts are predicting that the US dollar will strengthen in value of the short to medium term.

In your view, from a macroeconomic point of view, is the price of Andrewsmba likely to rise or fall in the short to medium term? Explain your answer. (This part of the Assignment should be answered in your Word document).

Part 2 (10 marks)

The Oily Bike Company (OBC) makes high end racing bikes. This year it will produce 12,000 at a cost of £2,500 each.

The production variable costs are, per bike:

• Materials - £325
• Labour - £475
• Other - £130

The fixed costs this year are:

• Property related - £825,000
• Salaries - £1,290,000
• Other - £3,750,000

The company has borrowings of £7.5 million, at an annual interest rate of 5%. It pays tax at 19%.

For the forthcoming year it is predicting the following:

• An increase in sales volume of 7.5% and sales prices of 3%. Variable costs will rise:
• Materials - 8.25%
• Labour - 2%
• Other - 1%
• Fixed costs are expected to rise:
• Property related - 3.25%
• Salaries - 2%
• Other - 1.75%

The company will borrow a further £1 million, at the same interest rate. The tax rate will remain at 19% for the forthcoming year.

This year the receivables day figure was 50 days. Next year the forecast is 40 days.

• A).Produce an Excel based model which shows the current income statement and the forecast position. The model should be capable of being used to sensitise the forecast. Your model should show contribution, operating profit, profit before tax and net profit. [This part of the Assignment should be answered in an Excel file, referenced from your Word document] (8 marks)

B).Estimate the cash received from customers, showing workings. [This part of the Assignment should be answered in an Excel file, referenced from your Word document]

Part 3 (30 marks)

a) Ali has been offered two jobs. A job at ScotsAlpha comes with a first year salary of £80,000. However, this company is considering making a major acquisition of another company, ScotsBeta. Ali estimates that the probability of making the acquisition is 0.7. If the company makes the acquisition, then there will be no bonuses for any staff. If the acquisition goes ahead Ali can apply to be the new CEO of ScotsBeta. He estimates that he has a 0.65 probability of getting the post (CEO of ScotsBeta). If he got this new role, he would have first year earnings of £120,000.

If the acquisition of ScotsBeta does not proceed then the company will award bonuses to all staff based on this year’s results. Ali estimates that there is a 0.45 probability of the bonus being £30,000, otherwise it will be £5,000.

The second offer is for a role at ScotsDelta. First year earnings will be £110,000. This company might be taken over, with an estimated probability of 0.35. If it is taken over then Ali will lose his job after 6 months leading to 1st year earnings of £55,000 due to the time taken to find a new role.

Draw a decision tree that Ali should use to make a decision as to which job offer to accept. The tree should include all chance and decision nodes, with all appropriate probabilities for each chance branch and end values (showing the various first year earnings). NOTE: you are not required in this section to calculate the value of any nodes nor make a recommendation to Ali as to which job he should take.

(10 marks)

b) A company has a choice. It may either launch a new product or sell itself. If it sells itself, it will raise £12m.

If it decides to launch the new product, then the launch may be successful with probability 0.65, unsuccessful with probability 0.35. A successful initial launch is worth £20m and an unsuccessful one, £7.5m.

Whether successful or not the company can decide to spend £10m scaling up production. Subsequent sales may then be successful with the probabilities in Table 1.

Table 1 Subsequent sale success probabilities

If after an initial success the company decides to not scale-up, subsequent sales will be worth £20m. If after an initial lack of success, the company decides to not scale up, subsequent sales will be worth £7.5m.

If after an initial success, the company scales up, the subsequent sales if successful are £35m and £30m if not successful. If after an initial unsuccessful launch the company scales up and is then successful, sales will be £15m, otherwise £7.5m.

All of this information is shown on the decision tree below.

Decision tree

• i.Calculate, showing workings, the values of nodes A, B, C, D, E and F.

(15 marks)

• ii.Interpret your findings and give a suggested strategy

(5 marks)

Part 4 (40 marks)

WHC plc is evaluating whether to launch a new brand of skin cream, Close ‘Em Pores (CEP). If it launches, it will be produced on a company site (land and buildings). If the project does not go ahead, the company will be able to lease out the unused site at an annual rent of £0.75m.

WHC commissioned two reports; the first was on the likely production costs. This report cost £1m and has already been paid for. The other report, costing £1.5m, provided market data. This report has not yet been paid for yet as WHC negotiated a 1-year credit period.

These reports suggest the following:

Investment in new equipment will cost £20m. This equipment attracts tax capital allowances of 25% for each of the first four years of use. It will be scrapped at the end of the 5-year project for £2m (a taxable amount). The equipment has a five-year life and will be depreciated in the accounts by £3.6m per annum in the accounts.

Revenues will be £17m in the first year. This is expected to rise by 2% for each of the remaining 4 years, to and including year 5. Costs (not including depreciation) will be 4.25m in the first year and are expected to rise by 0.5% per annum.

Sales of CEP will impact other brands sold by the company. The pre-tax cash surplus (that is, cash from sales less costs, before tax) from such lost sales is estimated to be £2.5m and will rise by 2% per annum.

Head office charges all new projects a set fee of 10% of its revenues to cover existing overheads.

The tax rate for WHC is 25%, payable in arrears. WHC expect projects to make a return of 8.25% per annum.

· a.Using an Excel model calculate the net present value, internal rate of return and the payback of this project. Show all workings

(20 marks)

· b.Using goalseek find the minimum revenue growth (of CEP). To show your answer take a screenshot of the goalseek table with the relevant cell addresses showing (i.e. before you press ‘ok’).

(5 marks)

· c.Create a data table showing the impact on NPV of changing the tax rate (use the range 20%-30%, in 1% intervals) and the CEP sales growth rate (use the range 0%-4%, in 0.5% intervals)

(5 marks)

· d.In your Word document, explain the meaning of ‘net present value’ and what it tells companies evaluating investments.

(10 marks)

• (2marks)