Analysis on capital budgeting npv or eaa, Finance Basics

Assignment Help:

As the Chief Financial Officer for the wholly Australian owned, Australian Stock Exchange listed company, Toy Show Ltd., an importer and manufacturer of a range of quality children's products sold throughout Australia, you have recently undertaken an evaluation of 2 mutually-exclusive machines that could assist the company in meeting its demand for the production of dolls houses. One of the machines is sourced from Germany and has a four-year expected life and the other is from Australia and has a six-year expected life. Each machine could comfortably cope with current and anticipated future production volumes for its premium dolls house lines.

You are now in the process of bringing together the capital budgeting information collected and preparing your final recommendations to be presented to the Board of Directors of the company at a special meeting that has been called to discuss your results and recommendations. Having had experience in making such presentations in the past to the current Board, you are aware that none have any extensive finance skills. As a result, it is important to provide any discussion in a manner that incorporates appropriate technical terms where relevant, but should where possible, use language that is clear and not presume any significant finance background.

The capital budgeting details prepared to date regarding the alternative machines are shown in the table below: Purchase price

Before-tax Present value of product sales

After-tax Present value of product sales

Before-tax Present value of operational costs

After-tax Present value of operational costs

German machine

$3.1 million

$27 million

$21.5 million

$20 million

$16 million

Australian machine

$4.2 million

$38 million

$29.9 million

$29 million

$23 million











In addition, you have collected the following current information about the company: Current share price:

$12

Number of shares on issue:

2,500,000

Current weighted average cost of capital:

14.5%

a) i) Why should your analysis of this capital budgeting proposal be undertaken on a before-tax basis?

ii) In the context of the question provide some thoughts as to why the machines subject to evaluation are stated to be "mutually-exclusive.

b) i) Calculate the appropriate (before-tax) net present value (NPV) of both the German and Australian sourced machines.

ii) Briefly explain why the NPV calculated above is not sufficient to make a selection between the 2 mutually-exclusive machines for capital budgeting purposes.

c) i) Calculate the appropriate value of both the German and Australian sourced machines based on the Equivalent Annual Annuity (EAA) approach. Include a brief explanation of the processes used for each calculation and an interpretation understandable to the Board as to what each calculation represents.

ii) Make a capital budgeting selection of either the German or Australian sourced machine based on your calculations in part c) i) of this question. Briefly justify your response.

d) i) Having made your capital budgeting selection, why would this financial decision be expected to impact on the company's share price? Briefly justify your response.

Note: No calculations are required for this part of the question - only a statement as to the expected direction of the share-price movement is required with a justification as support for your response.

ii) Following your discussion in part d) i) of this question, when would it be expected that a movement in the company's current share price would occur? Briefly justify your response.

iii) Given your statements in parts d) i) and ii) of this question, showing all calculations, what would be the amount of the expected change in the company's current share price and what is the anticipated new share price after this change? Briefly justify your response.

iv) In your opinion, why in practice is it likely that the actual fluctuation in the share price will be different from that calculated in part d) iii) of this question? Provide an explanation that could be used to present to the Board of Directors of the company.


Related Discussions:- Analysis on capital budgeting npv or eaa

Calculating project npv, 2.Calculating Project NPV-The Best Manufacturing C...

2.Calculating Project NPV-The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporation tax rate i

Dividend basis valuation, Dividend Basis Valuation Ownership of shares...

Dividend Basis Valuation Ownership of shares in entities - The owner to obtain a cash flow consisting of future dividends and the value of a share must correspond to the recen

Time value of money, How to calculate the present value of assignment??

How to calculate the present value of assignment??

Project apparisal, challenges your likely to face when apparising a project...

challenges your likely to face when apparising a project on the implemtation stage

Bonferronis approach, We have 10.000 genes and 4.000 of them are annotated ...

We have 10.000 genes and 4.000 of them are annotated for a certain attribute of interest. a. If we have a single set of 10 genes, how many of them should be annotated to be cons

Memo 1, Mr. de Ville, the owner of Tasman Ian de Ville Holdings Ltd. (TIDH)...

Mr. de Ville, the owner of Tasman Ian de Ville Holdings Ltd. (TIDH) has asked you to evaluate five investment projects. TIDH has a $10,000,000 investment budget, an investment hurd

Long term lenders - measuring business performance, Long Term Lenders - Mea...

Long Term Lenders - Measuring Business Performance Long term lenders These involve finances with loans, mortgages and debenture holders.  These have both short and long

Cash flow analysis problem, Problem: Cash Flow Analysis For the attache...

Problem: Cash Flow Analysis For the attached Gantt chart, the following information is available: Invoices are sent at the end of each month. Mark up is 20% on each invoi

Financial intermediaries, Financial Intermediaries These are instituti...

Financial Intermediaries These are institutions that link or mediate between the investors and savers: Some examples of financial intermediaries are as follow: 1. Comme

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd