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CORPFIN 1002 Business Finance
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CORPFIN 1002 Business Finance
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Course Code: CORPFIN1002
University: The University Of Adelaide
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: Australia
Questions:
1. On the basis of costs, would you recommend Radiant to purchase the specialised equipment and packaging facilities from Donnalley Limited or Danforth Limited? [You may assume both companies are able to supply the equipment on the same terms indefinitely.]
2. Based on your chosen specialised equipment and packaging facilities in Question 1, prepare a cash flow table (which incorporates taxes and includes initial investment, operating and terminal cash flows) using the information given in the case.
Answers:
1
Radiant should purchase the specialized equipment and packaging facilities from Donnalley Limited because it would be $2.6 million cheaper than
Danforth from a cost basis.
2a
No, the market testing cost is a sunk cost, hence it is not relevant to include into the future cash flows.
2b
No, the annual interest expense should be ignored because cost of financing is accounted for in the discount rate.
2c
Yes, the change in working capital is relevant and hence these cash flows should be recognized.
2d
Yes, the erosion of sales from current detergents should be included as these will affect the future revenues, and hence are a cost Radiant will bear should it produce FAB.
2e
Yes, the cost of using current excess production facilities and annual rental cost to an outside firms, should be included as these are opportunity costs arising from utilizing current resources elsewhere.
3
criterion
Decision
NPV
$ (311,173)
<0; Reject
IRR
10.22%
< 15%; Reject
Payback Period
4.56
Accept <5 years
Profitability Index
0.85
< 1; Reject
Radiant should Reject the project
4
Yes, competitive actions may affect future sales revenue, as revenues would be diverted elsewhere, hence qualitative decisions should be considered alongside any quantitative decisions, when making project decisions. However, on a
NPV basis, the project should be rejected on an isolation basis.
5a
VARIABLE: NET CASH FLOWS
Scenario
Cost of capital
NPV
-20%
15%
(668,938)
0%
15%
(311,173)
20%
15%
46,593
VARIABLE: COST OF CAPITAL
Scenario
Cost of capital
NPV
-20%
-5%
2,100,884
0%
15%
(311,173)
20%
35%
(1,017,432)
5b
Minimum -17%
5c
NPV -(233,492)
IRR-11.49%
Payback Period-4.35
Profitability Index-0.89
6
Radiant should reject the project on the current basis. However, from the sensitivity analysis, if they are able to increase net cash flows by at least 17% or are able to reduce their cost of capital to 10.22% , then they should invest in the project. Furthermore, inflation should be factored into the cash flows as this will also have an impaction on the NPV
Lastly, quantitative methods such as NPV should not be considered in isolation. Radiant should also consider other qualitative decisions, such as competitor actions, which may affect future revenues.
CASH FLOWS
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Operating Revenue
630,000
630,000
660,000
660,000
690,000
690,000
690,000
590,000
590,000
590,000
Less loss of Revenue
90,000
90,000
110,000
110,000
130,000
130,000
130,000
100,000
100,000
100,000
Less operating costs
120,000
120,000
120,000
120,000
120,000
120,000
2,120,000
120,000
120,000
120,000
Operating profit
420,000
420,000
430,000
430,000
440,000
440,000
(1,560,000)
370,000
370,000
370,000
Less Depreciation Exp
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
Net Income before tax
(105,000)
(105,000)
(95,000)
(95,000)
(85,000)
(85,000)
(2,085,000)
(155,000)
(155,000)
(155,000)
Less Income Tax
(31,500)
(31,500)
(28,500)
(28,500)
(25,500)
(25,500)
(625,500)
(46,500)
(46,500)
(46,500)
Net Income after Tax
(73,500)
(73,500)
(66,500)
(66,500)
(59,500)
(59,500)
(1,459,500)
(108,500)
(108,500)
(108,500)
Add Depreciation
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
Operating ATCF
451,500
451,500
458,500
458,500
465,500
465,500
(934,500)
416,500
416,500
416,500
Working capital
(100,000)
(75,600)
(75,600)
(79,200)
(79,200)
(82,800)
(82,800)
(82,800)
(70,800)
(70,800)
(70,800)
Change in Working Capital
(100,000)
24,400
0
(3,600)
0
(3,600)
0
0
12,000
0
0
Operating ATCF
(100,000)
475,900
451,500
454,900
458,500
461,900
465,500
(934,500)
428,500
416,500
487,300
Initial Investment
(2,000,000)
Terminal ATCF
56,000
ATCF
(2,100,000)
475,900
451,500
454,900
458,500
461,900
465,500
(934,500)
428,500
416,500
543,300
Cum ATCF
(2,100,000)
475,900
927,400
1,382,300
1,840,800
2,302,700
2,768,200
1,833,700
2,262,200
2,678,700
3,222,000
NPV
(311,173)
IRR
10.22%
Payback Period
4.56
Profitability Index
0.85
Solution 5c
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Operating Revenue
648,900
668,367
721,200
742,836
799,899
823,896
848,613
747,394
769,816
792,911
Less loss of Revenue
92,700
95,481
120,200
123,806
150,706
155,227
159,884
126,677
130,477
134,392
Less operating costs
123,600
127,308
131,127
135,061
139,113
143,286
2,607,333
152,012
156,573
161,270
Operating profit
432,600
445,578
469,873
483,969
510,081
525,383
(1,918,603)
468,705
482,766
497,249
Less Depreciation Exp
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
Net Income before tax
(92,400)
(79,422)
(55,127)
(41,031)
(14,919)
383
(2,443,603)
(56,295)
(42,234)
(27,751)
Less Income Tax
(27,720)
(23,827)
(16,538)
(12,309)
(4,476)
115
(733,081)
(16,889)
(12,670)
(8,325)
Net Income after Tax
(64,680)
(55,595)
(38,589)
(28,722)
(10,444)
268
(1,710,522)
(39,407)
(29,564)
(19,426)
Add Depreciation
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
525,000
Operating ATCF
460,320
469,405
486,411
496,278
514,556
525,268
(1,185,522)
485,593
495,436
505,574
Working capital
(100,000)
(77,868)
(80,204)
(86,544)
(89,140)
(95,988)
(98,868)
(101,834)
(89,687)
(92,378)
(95,149)
Change in Working Capital
(100,000)
22,132
(2,336)
(6,340)
(2,596)
(6,848)
(2,880)
(2,966)
12,146
(2,691)
(2,771)
Operating ATCF
(100,000)
482,452
467,069
480,071
493,682
507,709
522,388
(1,188,488)
497,740
492,746
597,952
Initial Investment
(2,000,000)
Terminal ATCF
56,000
ATCF
(2,100,000)
482,452
467,069
480,071
493,682
507,709
522,388
(1,188,488)
497,740
492,746
653,952
Cum ATCF
(2,100,000)
482,452
949,521
1,429,591
1,923,273
2,430,982
2,953,371
1,764,882
2,262,622
2,755,368
3,409,320
NPV
(233,492)
IRR
11.49%
Payback Period
4.35
Profitability Index
0.89
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