Financial Accounting

Respondents are required to fill out a spreadsheet highlighting NPV, Required rate of return, payback period and internal rate of return of the project. All calculations to support the decision must be included. I have included the question below aswell as a sample of the way in which it should be answered. 

 

Actual question attached is titled : Viking boats final upload (this should be answered on the attached spreadsheet titled ‘Assignment submission sheet’)

 

Sample on the format of the answer attached titled: Sydney harbour fuel price

 

Please read these in order

1(2)

AFIN 253
Financial Management

Due: Monday 22nd October 12 Noon

This assessment is worth 20% of your final grade.

Viking Boats Pty Ltd

Bob Bradley is the owner and founder of Viking Boats Pty Ltd. Viking is a world leader in the
production of luxury motor cruisers. Given the current focus surrounding pollution and global warming,
Mr Bradley is considering the development of a hybrid luxury boat that will be able to be powered by
diesel and electricity. Despite the expected success of the project, costs are expected to be quite large
for the company, as it will require a great deal of new production equipment.

Whilst the existing equipment can be used for the production of the boat hulls new machinery will be
required for engine production. This new engine production machinery is expected to have an economic
life of ten years, although Bob’s accountant believes it may well be still in good working order in 15
years. With this in mind the accountant says he will depreciate it over the full 15 years to dissipate these
expenses over a longer period. He has recommended that any project evaluation also use this 15 year
timeframe. It would cost Viking Boats $18,000,000 to purchase the machinery, $2,000,000 to have it
delivered and a further $160,000 to have it installed. The installation costs are immediately tax
deductible. The company has also spent $200,000 on a research report prepared by Olympic sailing gold
medallist Tom Slingsby. This is also an allowable tax deduction. The taxation department has stated in
a letter to Viking Boats that they will allow the equipment to be depreciated over its economic life of ten
years on a straight-line basis.

It is expected that current staff will not require any additional training. Given your success in Afin 253
Financial Management while studying at Macquarie University they have decided to employ you as an
outside consultant to determine what would be the correct course of action for them to take.

It is anticipated that if they produce this new boat that it will overlap with their existing Challenger range
of mid size cruisers. This will mean that they can downsize to a smaller number of manufacturing
machines for the Challenger and will sell one of their older machines. It would be most profitable to sell
the 16 year old machine that originally cost $4,000,000 and should be able to be sold for $700,000. The
tax allowable depreciation rate for this type of machinery hasn’t changed over the last 40 years; it is
straight line down to zero value over 20 years.

The waters around the Viking Boats factory are populated by a number of sharks due to the nearby tuna
canning factory. Often boat trials result in capsizes of test models. To prevent this they have for many
years employed James Theodore to scare away the sharks using high intensity lasers. James is paid
$10,000 per year and will continue to be employed on this wage for many years to come.

The new machine is expected to have a salvage value of $6,000,000 at the end of the projects’ economic
life in year 10. The sales department believe the reduced sales from the Challenger will amount to
around $2,500,000 p.a. for the life of the project.

2(2)

Revenue from sales of the new boat is expected to be $4,000,000 in year one and $6,000,000 in year 2.
The revenue will increase by 5% per annum between years 3 and 5 then remain flat for the rest of the
project’s life.

Electricity costs are expected to increase by $300,000 pa in years 1 to 4 and $320,000 pa in years 5 to 10
Material costs are expected to decrease by $104,000 pa.

Head office costs of $10,000 are to be allocated from the existing Challenger production to the new boat.
These are of course fully tax deductible.

Given the size of the project it is expected that Viking Boats will borrow $20,000,000 at a government
subsidised interest rate of 3.5%. Interest expense is tax deductible of course.

Marketing costs are expected to be $900,000 in years 0 to 3 and $500,000 in years 4 to 9.

Due to the increased production there will be an increase in the working capital requirements for the
time the new machine is in use. This increase is expected to be 15% of the following year’s increase in
revenues. Assume that all amounts above are paid at the end of the year.

The after-tax WACC used for projects of similar risk is 7.5%, given as a real rate. Treasury bonds yield
around 4.5% p.a and pay semi-annual coupons of 8% pa. The firm’s bonds pay semi-annual coupons of
5% pa and trade at a yield of 6% pa. The ASX200 trades at a 7% p.a. premium. All of the above rates are
nominal rates except for the after-tax WACC, which is a real rate. The company tax rate is 30%. The
firm maintains a constant debt to equity ratio of 40%. Inflation is expected to stay at 3% pa. All of the
cash flows given are nominal.

You are required to submit the following;

1. One page readable spreadsheet downloaded from iLearn clearly showing the NPV, Required
Rate of Return, Payback Period and Internal Rate of Return of the project and all other
calculations that are used to support your decisions. (20 marks)

Note: Questions about the assignment can only be asked via the
discussion board in iLearn.

Tutors and lecturers will not answer student questions as they relate to
the assignment.

Only one page should be submitted to BESS before the due date and
time. Do not submit using more than one page and/or plastic sheets etc.

Damian Bridge� 10/10/12 11:56 AM
Formatted: Font color: Red, Strikethrough

2

>Answer

2

at the start

at the start

Cash flows

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.0

Total cash flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Assignment

Name:

SID:

Tutorial Time & Day:

Tutor:

Signature:

Year

0

1

3

4

5

6

7

8

9

10

Cash flows

Total cash flows

Cash flows over life

Total cash flows over the life

Cash flows at the end

Total cash flows at end of project

Summary and NPV calculations

At start

0.0

Over the life

At the end of the project

Required rate of return

Total NPV

Accept/Reject Project

Payback Period

Internal rate of return

&R&P

2

>

Sydney Ha

r

bour Fuel

Sydney Harbour Fuel

2

at the start

)

)

on

Sale

aren’t replaced

2,000,000.00 2,000,000.00 2,000,000.00

6,000,000.00

10,000,000.00 10,000,000.00 10,000,000.00 10,000,000.00

20,000,000.00 20,000,000.00 20,000,000.00 20,000,000.00 20,000,000.00 20,000,000.00 20,000,000.00 20,000,000.00 20,000,000.00

(4,000,000.00) (4,000,000.00)

(2,000,000.00)

1,000,000.00 1,000,000.00

800,000.00

Salvage

)

)

(3,200,000.00) (3,200,000.00) (3,200,000.00) (3,200,000.00) (3,200,000.00) (3,200,000.00) (3,200,000.00) (3,200,000.00) (3,200,000.00)

2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00

200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00

16,002,000.00

27,002,000.00 27,002,000.00 27,002,000.00 27,002,000.00

Tax

(4,800,600.00)

(8,100,600.00) (8,100,600.00) (8,100,600.00) (8,100,600.00)

2,200,000.00 2,200,000.00

2,400,000.00 3,200,000.00 3,200,000.00 3,200,000.00 3,200,000.00 3,200,000.00

0

13,401,400.00

0

0

0

0

22,101,400.00 22,101,400.00 22,101,400.00 22,101,400.00

1,100,000.00

0 1 2 3 4 5 6 7 8 9 10
Cash flows

(30,446,000.0)

13,401,400.0 13,401,400.0 13,261,400.0 17,661,400.0 17,381,400.0 22,101,400.0 22,101,400.0 22,101,400.0 22,101,400.0 22,101,400.0

4,460,000.0

(30,446,000.0) 13,401,400.0 13,401,400.0 13,261,400.0 17,661,400.0 17,381,400.0 22,101,400.0 22,101,400.0 22,101,400.0 22,101,400.0

(30,446,000.0)

(30,446,000.0)

/Reject Project

Accept

Note that the figures below have the sign (+ or -) as is given in the Net Income or CFFA equations. So for example, CapEx: new vessels is negative not because we sold the boats, we bought them.
It’s made negative since CapEx is subtracted from CFFA. This means that total CFFA can simply be summed rather than subtracted. Doing it this way is fine, but you can also take the sign of the number into account in the total which is fine too. For example, you could have a positive CapEx, and subtract that number from total CFFA.
Year			0			1		3			4				5			6			7		8		9		10
	Cash flows
CapEx: New Vessels	(3			2,000,000.00
Working Capital	(	1,100,000.00
Retrnechment	(70,000.00)
Sell Old Boats	1,920,000.00
Book value of old boats according to tax office	4,600,000.00
	Tax	Salvage	804,000.00
Total cash flows at the start					(30,446,000.0)
assumes that renovated	barges
NI over life
Revenue – Light Diesel		6,000,000.00					10,000,000.00
Revenue – heavy Deiesel										20,000,000.00
Lost petrol Revenue			(4,000,000.00)		(2,000,000.00)
Old Depreciation			1,000,000.00		800,000.00
(										200,000.00	(400,000.00)
Depreciation New Barges										(					3,200,000.00
Insurance										2,000.00
Wages Saved
NI before tax		16,002,000.00	15,802,000.00	21,802,000.00	21,402,000.00					27,002,000.00
	(4,800,600.00)	(4,740,600.00)	(6,540,600.00)	(6,420,600.00)					(8,100,600.00)
Cash flows over life
Add back Depreciation			2,200,000.00		2,400,000.00
Note that the other items in CFFA are zero so we only add back depreciation here.
Total cash flows over the life						13,401,400.0			13,261,400.0			17,661,400.0			17,381,400.0														22,101,400.0
Cash flows at the end
Salvage Value	3,360,000.00
Working capital
Total cash flows at end of project		4,460,000.0
Summary and NPV calculations
At start
Over the life
At the end of the project
26,561,400.0
Cumulative cash flows to calculate payback period	Payback	(17,044,600.0)	(3,643,200.0)	0.275
Required nominal rate of return (assumed that it is after tax)	12.500%
Required real rate of return (assumed that it is after tax)	7.143%
PV (cash flows)	11,912,355.6	10,588,760.5	9,313,905.1	11,025,925.1	9,645,442.2	10,901,961.7	9,690,632.6	8,613,895.6	7,656,796.1	8,179,480.8
Total NPV	67,083,155.1	$67,083,155.15
Note that we’re using the ‘textbook’ method of valuation since we discount unlevered CFFA using the after-tax WACC.
	Accept
Payback Period	2.2747
Internal rate of return	48.9%

&R&P

Sheet1

0 1 2 4

barges 5 6 7 5

2000000 2000000 2000000

10000000

r

10000000

time
cost				2000000
		10000000	12000000	14000000
0.1
PV(cash flows)	10909090.9090909	11570247.9338843	6830134.55365071

2

>Answer

2

at the start

Savings Loss on sale

at the start

– 2,500,000 – 2,500,000 – 2,500,000 – 2,500,000 – 2,500,000 – 2,500,000 – 2,500,000 – 2,500,000 – 2,500,000

6,945,750 6,945,750 6,945,750 6,945,750 6,945,750

– 300,000 – 300,000 – 300,000

– 320,000 – 320,000 – 320,000 – 320,000 – 320,000

104,000 104,000 104,000 104,000 104,000 104,000 104,000 104,000 104,000

200,000 200,000 200,000

– 2,000,000 – 2,000,000 – 2,000,000 – 2,000,000 – 2,000,000 – 2,000,000 – 2,000,000 – 2,000,000 – 2,000,000 – 2,000,000

marketing – 900,000 – 900,000 – 900,000

– 500,000 – 500,000 – 500,000 – 500,000 – 500,000

Tax

– 518,925 – 518,925 – 518,925 – 518,925

1,210,825 1,210,825 1,210,825 1,210,825

1,800,000 1,800,000 1,800,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000

– 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0 – 0

Working Capital 0

1,041,862.50 1,041,862.50 1,041,862.50 1,041,862.50 1,041,862.50

600,000.00

– 0 – 0 – 0 – 0 – 0

3,210,825 3,210,825 3,210,825 3,210,825

6,000,000

Tax Benefit

1 2 3 4 5 6 7 8 9 10
Cash flows

(20,612,000.0)

3,210,825.0 3,210,825.0 3,210,825.0 3,210,825.0

Total cash flows (20,612,000.0) 522,800.0 2,177,800.0 2,385,550.0 2,883,687.5 3,210,825.0 3,210,825.0 3,210,825.0 3,210,825.0 3,210,825.0

(20,612,000.0)

Project

Reject

																																																																																																																			Assignment	Name:	SID:	Tutorial Time & Day:	Tutor:
Signature:
Year		0		1		3		4		5		6		7		8		9		10
	Cash flows
Machine	– 18,000,000
Delivery											–						2,000,000
Installation	– 160,000
Install tax Deduction	48,000
Sell Old Machone	700,000
	Tax	30,000
	marketing				– 900,000
marketing	Tax Benefit	270,000
	Working Capital	– 600,000
	Total cash flows				(20,612,000.0)
Cash flows over life
Reduced Sales of Challenger										– 2,500,000
Revenue	4,000,000		6,000,000	6,300,000	6,615,000						6,945,750
Electricity				– 300,000						– 320,000
Material Costs										104,000
Old Depreciation				200,000
New Depreciation
					– 500,000
418,800	– 181,200	– 271,200	– 485,700					– 518,925	– 668,925
Sum	– 977,200	422,800	632,800	1,133,300					1,210,825	1,560,825
add back depreciation				1,800,000																																																																			– 0
	600,000.00	900,000.00	945,000.00	992,250.00						1,041,862.50
Change	(300,000.00)	(45,000.00)	(47,250.00)	(49,612.50)
Total cash flows over the life	522,800	2,177,800	2,385,550	2,883,688					3,210,825	3,560,825
Cash flows at the end
Salvage Value
– 1,800,000
Working Capital At end	1,041,863
Total cash flows at end of project	5,241,863
Summary and NPV calculations
At start
Over the life		522,800.0		2,177,800.0		2,385,550.0		2,883,687.5										3,210,825.0	3,560,825.0
At the end of the project	5,241,862.5
8,802,687.5
Payback	-20,089,200.0	-17,911,400.0	-15,525,850.0	-12,642,162.5	-9,431,337.5	-6,220,512.5	-3,009,687.5	0.9374
Required rate of return	10.7%
472,160.76	1,776,342.13	1,757,322.45	1,918,516.06	1,929,248.59	1,742,378.49	1,573,608.94	1,421,186.67	1,283,528.26	3,178,032.94
Total NPV	– 3,559,674.7
Accept/	Reject
Payback Period	7.9374
Internal rate of return	7.4%

&R&P

Sheet1

200000