The directors of Woodcote Range Co., a listed company, are planning to meet market demand for its products by purchasing new machinery costing $3.5 million. The project name is ‘Growth’.
The machinery would last for five years, at the end of which it would be replaced. The scrap value of the machinery is expected to be 5% of the initial cost.
Capital allowances would be available on the cost of the machinery on a 25% reducing balance basis, with a balancing allowance or charge claimed in the final year of operation.
This investment will increase production capacity by 10,000 units in the first year, increasing by a further 5% per year for years 2 to 5.
Relevant financial information in current price terms is as follows:
– Selling price $450 per unit with inflation 3.5% per year.
– Variable cost $275 per unit with inflation 4% per year.
Production departments take a share of existing overheads to the sum of $575,000 per annum and the project will generate incremental overheads of $300,000 per annum both quoted in current prices. Inflation of 6.0% per year applies to overheads.
The machinery will also require the use of warehouse space which is currently being rented out and earning rental income of $120,000 per annum in current terms. The rental income is due to increase by 1.5% per annum. This income will be foregone if the project goes ahead.
There will be working capital requirements of $500,000 at the outset. This amount will be released in full at the end of the project.
Woodcote Range Co. pays tax on profits at the rate of 20% per year, one year in arrears.
The company has a nominal (money terms) after-tax cost of capital of 15% per year.
You have been asked to produce a report for the directors of Woodcote Range Co. to include the following:
1. A calculation of:
a) the net present value of project Growth using a nominal (money terms) approach; and
b) the payback period for project Growth.
A detailed analysis showing how the NPV and payback period have been calculated should be included as an appendix to the report, together with any assumptions and related calculations.
2. Advice to the directors of Woodcote Range Co. on the viability of the proposed investment, and a summary of non-financial factors that the directors should consider before finalising their decision. Your advice should include an evaluation of the benefits and disadvantages of the two appraisal methods used.
3. A discussion and critical evaluation of the theory that Financial Management involves determining an optimum capital structure. You should refer to relevant models and theories to support your work.
The work submitted should use a variety of sources. Marks are available for the presentation of your report including structure, style and the presentation of referencing.
The word limit for the report is 3,000 words (+/- 10%), excluding references, and the word count should be shown at the end of the document.
The document must be your own work, but you are expected to demonstrate that you have utilised multiple literature sources from the academic, professional and technical literatures. Please note that sites such as Wikipedia and Investopedia, whilst useful as a starting point for your research, are not suitable sources for your assignment, so you need to widen your search to include other texts and sources.
The use of literature must be referenced using the Harvard system. Failure to acknowledge the work of others is plagiarism and will result in a case of Academic Misconduct being filed by the assessor.
A guide published by the library lists the most common types of references with examples. The guide is published at: https://advice.southwales.ac.uk/a2z/referencing-pl… good-academic-practice/