Reference no: EM133118756
7BSP1245 Finance for International Business - University of Hertfordshire
Learning Outcome 1: evaluate strategies available to an organisation to enable the creation and maintenance of value.
Learning Outcome 2: assess the financing choices available to organisations and the relevance of capital structure.
Learning Outcome 3: analyse the financial and operating risks faced by organizations and the strategies for mitigating these risks.
Learning Outcome 4: research the specific issues relating investing and raising finance on an international basis
Learning Outcome 5: analyse financial statements and interpret the results in the context of value creation.
Learning Outcome 6: critically evaluate capital investment proposals both domestic and international including estimation of component and overall capital costs.
Learning Outcome 7: devise strategies for identifying and managing foreign exchange risk and the risks of international investment.
Learning Outcome 8: devise financial strategies f or enhancing enterprise value.
Assignment - Investment Appraisal Report
Assignment:
Report testing an evaluation of international business finance decisions
Brexylite plc, a UK medium sized listed firm manufactures handheld games consoles. In recent years the directors, headed by the Chief Executive Officer Mr Tanaka, have stated that the business has reached limits of development in its present form. Future development requires large-scale expansion to compete with the existing and emerging companies.
The directors have investigated several possibilities, deciding eventually to expand their production facilities and establish their own distribution system so that their newly 'branded' products can be sold in independent, quality retailers around Great Britain, Europe, and USA. You have been assigned the responsibility of evaluating the purchase of a new machine to produce a new gadget (Pro-3). The product has a four-year product life cycle. The company has spent £300,000 on market research during the past year. The machinery is expected to cost £8 million. The company spent £30,000 on consultancy fees last year.
Production and sales of Pro -3 consoles are forecast to be as follows:
The unit sale and unit variable cost of the (Pro-3) product will create a contribution of £10 per unit. Contribution per unit is expected to rise by 5% per annum. All the increased production will be exported in approximately equal proportions to Eurozone and USA. Thus, the firm will have some cash flows denominated in Euro, €, and $USA and the contribution figure given above is the sterling equivalent of these cash flows at current exchange rates
An increase in fixed rent costs of £100,000 per annum is expected since Brexylite plc has no spare capacity in space and will rent additional premises. The rent fee is not subject to inflation. Professional fees of £50,000 will be incurred at the first year of the project (not subject to inflation). Marketing fees of £60,000 per annum will be incurred. This is subject to an annual inflation of 1%. Labour cost will be £9/hr and each unit produced will require half an hour of labour time.
Producing and selling Pro-3 will require investment in working capital of £1.5m in T0. The working capital will be recovered at the end of the project.
Brexylite plc incurs corporation tax charges of 20% per year. Tax lability is paid one year in areas. Tax will be applied on the operating cash flows, after all expenses have been deducted but will not include the working capital and residual values. Liability to tax will not currently be reduced by capital allowances on new machinery. The new machine is expected to have £500,000 future scrap value at the end of the four-year period.
Brexylite plc uses WACC as the discount factor for investment appraisal purposes. Any new venture would be expected to achieve a maximum payback period of 4 years, together with a minimum Return on Capital Employed of 20% (using the average investment method of calculation)
The following information is available regarding how the Brexylite Plc is currently financed:
•Ordinary Share Capital:
Brexylite plc has 20m ordinary shares in issue and each is trading at 108p ex- div. A dividend of 12p per share has just been paid. The dividend growth varies each year. The beta for Brexylite Plc is 0.85, T-Bills are offering 3.5%. The FTSE all index return is 13%.
•Preference Share Capital:
The balance sheet indicates that £2m of preference capital has been issued. They are shown as 5% £0.50 shares. Current share price is 25p per share.
•Debt Capital:
10% debentures are due to mature in 4 years at par. The current market value of each debenture is £108, and the total book value of the debentures is £5m.
8% irredeemable bonds are trading at £97. The interest has just been paid. There are £2m nominal value worth of irredeemable bonds, as per the statement of financial position.
•The corporation tax rate applicable is 20%.
To raise the funds required for investment on the new machinery and expansion, the board of directors will consider either increasing borrowing or an issue of new shares. The United Kingdom government is currently renegotiating new trade arrangements with the European Union and a few other countries, and the performance of Pro-3 product will depend on the outcome of those negotiations. If the UK government can obtain favourable trading terms, then the sales cash flows from the project could be higher than the current ones. There is, though, a small chance that trade terms will be unfavourable resulting in sales cash flow being marginally less than projected ones
Required
You are required to produce a written business report in which you evaluate the investment proposal on behalf of Brexylite Plc and advise the firm whether the project is acceptable on a financial basis. Also, comment on the potential impact of foreign exchange risk on the project. Your report should discuss and recommend alternative sources of financing the project. You should support your arguments with relevant theory and calculations and indicate any non-financial matters you feel should be taken into consideration.
Your answer should be presented in the form of a report of 2000 words total (excluding the reference list). You must also submit a separate Excel spreadsheet containing your calculations.
Further guidance
You are required to apply a range of methods to carry out the investment appraisal of the project. Your report should
i) Provide and evaluate the robustness of your findings, referring to appropriate theory in investment appraisal, cost of capital and risk.
ii) Discuss sources of finance that could be considered for the project and their possible impacts.
iii) Explore the non-financial factors management would need to consider in addition before making a final decision on the project.
iv) Explore currency risk and how this can be mitigated, comment on the potential impact of foreign exchange risk on the project
Only relevant cash flows, which are the incremental cash flows arising as the result of an investment decision, should be included in the investment appraisal.
Relevant cash flows include opportunity costs and incremental investment in working capital.
You are required to also submit a working excel sheet with all the cashflows, workings of Cost of capital, NPV, IRR, Payback, ROCE.
Guidance for the preparation of your report.
The purpose of this assignment is simply to give you the opportunity to demonstrate that you have acquired the knowledge and skills identified in the Module Outcomes and that you can apply them in a typical business situation. Do refer to the assessment criteria given on the Module site which gives an outline of how marks will be awarded.
You should approach the task as a business manager dealing with a ‘real' business and should:
a) Adopt a coherent approach to dealing with the set task with a clearly stated business purpose.
b) Identify an appropriate theoretical dimension and consider the implications for practice.
c) Adopt appropriate analytical methods and a critical perspective.
d) Refer to empirical work where appropriate.
Attachment:- Finance for International Business.rar