Reference no: EM132312801

Introduction to Finance Assignment -

Learning Outcome(s) Assessed -

• Evaluate financing options relevant to business operations.
• Integrate financial management techniques for strategic planning purposes.
• Critically review, analyse, and interpret financial and non-financial information to inform strategic decision making.

Instructions for assessment: For this assessment you are required to prepare Excel spreadsheets with calculations in Part A and prepare a written report for the owner of a business in Part B.

Background -

Janine Taiora is the owner of a gift shop called, Rerehua Ltd, which specialises in pounamu carved by her father as well as a range of other gifts. It is located in a new commercial district in Christchurch. The area once had a lot of foot traffic from retail shoppers but is now more of a commercial offices area. Sales have been poor over the last three years and Janine is keen to expand her business by offering takeaway coffee within her gift shop. By doing this, she believes she can pick up customers from the new commercial office staff who will come in for coffee and browse for gifts while waiting. Janine has had trouble with paying her bills and she believes that this is the best way for her to be able to hold on to her business, which is very important to her and her whanau.

As a friend of yours, she knows you are studying Business Finance and has come to you for financial advice on her proposal.

Rerehua Ltd has been operating for 8 years and is set up in a company structure with the shares owned equally between herself and her father. Janine works in the shop and has one part time assistant, Cecilia. She pays her father commission for the pieces he produces that are sold.

Janine has given you the following estimates of the cost and potential financial benefits of her proposal.

The coffee machine can be purchased from Pukeko Ltd (a coffee roastery established in 2015) at a cost of $18,000. It will cost $2,450 to install the machine, as a purpose built counter will need to be created. The additional revenue has been estimated in increased gift sales as well as the coffee sales themselves to be $18,000 in the first year with growth each year of 5% more than the previous year. Additional expenses are estimated at $5,700 in the first year and these will also grow by 5% each year. The initial inventory of coffee (imported from Brazil), takeaway cups etc will cost $1,200. Janine has decided to offer credit to the larger businesses in her area and so will have increased accounts receivable of $2,500. The set up expenses will also include additional accounts payable of $850.

Janine is pleased to have found a nearby barista course that she and her staff member can attend and this will cost $1,200 in total.

Janine has been to her bank and they have offered her a 10% p.a. 6-year loan for the coffee machine and installation costs. The machine would be depreciated using a straight-line method over its expected 6-year useful life.

Pukeko Ltd have also offered as an alternative a maintained operating three-year lease for the coffee machine. If Janine takes up the operating lease option, she will need to use the Pukeko Ltd brand of coffee. Lease payments would be $4,000 per year and are required to be made at the beginning of each year. The lease has a right of renewal of an additional three years. The machine would be expected to be returned to Pukeko Ltd in an appropriate wear and tear condition otherwise penalties would apply.

You see the potential in Janine's business and have decided to propose to Janine that you could become a minority shareholder in the business with a 20% shareholding for a $20,000 investment. You would also require that you be made a member of her Board of Directors so that you can keep a close eye on the business.

You estimate Janines's Weighted Average Cost of Capital at 14%. You advise Janine that the project should be assessed over a 6-year life, which is the expected life of the coffee machine.

The New Zealand company tax rate will apply.

PART A - YOU ARE REQUIRED TO:

Using an Excel spreadsheet and preparing all answers to two decimal places:

1. Calculate the initial investment if Janine purchases the coffee machine.

2. Calculate the 'net operating cash flows after tax' if Janine purchases the coffee machine.

3. Calculate the NPV of the project using the Excel function.

4. Calculate the IRR of the project using the Excel function.

5. Performing a sensitivity analysis on the sales targets. Calculate the NPV as if the expected revenue is 15% less than initially thought and then only grows at the rate of 3% per year. All other variables remain the same.

6. Use the Excel function to calculate the payment required to pay off the loan in equal year instalments. Prepare the two spreadsheets required to calculate the present value cost of using a six-year loan from the bank to purchase the coffee machine. Note: Use the after tax cost of debt to calculate the present value.

7. Calculate the present value cost of leasing the coffee machine from Pukeko Ltd for six years. Note: Use the after tax cost of debt to calculate the present value.

PART B - YOU ARE REQUIRED TO:

Write a report of 2000-2500 words for Janine, providing advice and recommendations on the feasibility of the project, the preference for lease or purchase, and the risks associated with both the project and her business in general.

Your report should be structured as follows:

1. Introduction

1.1. Outline brief background about Rerehua Ltd that will help a reader understand the context in which it is written.

1.2. Provide a brief outline the purpose of your report.

2. Overview

Explain how the Net Present Value (NPV) and Internal Rate of Return (IRR) methods are used to determine the feasibility of a project. (In general terms, not specific to this report).

3. Findings and recommendations

3.1 Analyse the project's feasibility using both the NPV and the IRR calculations in Part A, Q 1-4. Provide recommendation(s) as to whether Rerehua Ltd should go ahead with installing a coffee machine in her shop based solely on this financial data.

3.2 Explain what is meant by a sensitivity analysis and analyse the project's feasibility when the Sensitivity Analysis data is considered in Part A Q5.

3.3 Analyse the calculations in Part A, Q6 and Q7. Make a recommendation as to whether Rerehua Ltd should lease or purchase the coffee machine. Consider all financial and non-financial factors, not just the results of your calculations.

4. Analysis: Risk Factors

4.1. Define internal business risk. Assess whether the Rerehua project will increase or decrease the business risk. Explain your answer.

4.2. Define internal financial risk. Explain how financial risk may increase through a new project. Identify whether the Rerehua project has high or low financial risk. Explain your answer.

4.3. Identify and explain external risk factors that Rerehua Ltd should consider. (Note: You must consider at least three (3) of the PESTEL factors and specifically explain how this factor may impact the business).

4.4. Explain one (1) externality that the new project could create. Define the 'shared value approach' to externalities. Suggest one (1) approach Rerehua Ltd could take that would encompass a share value approach to externalities.

4.5. Rerehua Ltd is considering purchasing their coffee beans direct from Brazil rather than using a local supplier. Explain what is meant by indirect and direct exchange rates. Research the current exchange rate for NZD: BRL. If 10 kg of coffee costs BRL400 find out what would be the NZD cost of coffee under the different exchange rates that have applied over the past year (make one calculation per month and state the date and rate you used). Discuss the implications of your findings.

4.6. Explain the operating exposure of Rerehua Ltd if they decide to buy the coffee direct from the overseas supplier. Explain two (2) strategies they could use to overcome operating exposure and whether these would be viable options for Rerehua Ltd.

5. Financing options

Compare and contrast Rerehua Ltd using a long-term loan to purchase the coffee machine with your proposal to issue shares to you as an alternative financing option for Rerehua Ltd. Discuss both the advantages and disadvantages. You do not need to do any further calculations for this section. Justify why you believe this would be a good option for Rerehua Ltd.

6. Conclusion

Summarise: Your recommendations made in Section 3 above. The risks associated with the business discussed in Section 4 above. Your proposal outlined in Section 5 above.

7. Bibliography and/or References

Do not use any references other than the class textbook. Reference this in APA format using both in-text citations and here as a listed reference.

Attachment:- Assignment File.rar