Recent Question/Assignment

Assessment item 3
Case Study - Valuation
Value: 15%
Due date: 19-Sep-2016
Task
You’ve been offered a full time position as an assistant financial analyst at Bathurst Metal Works. Your latest assignment involves the analysis of several risky projects. Because this is your first assignment dealing with risk analysis, you have been asked not only to provide a recommendation on the project in question but also respond to a number of questions aimed at judging your understanding of risk analysis and capital budgeting. The memorandum you received outlining your assignment follows:
To: Assistant Financial Analyst
From: Chief Financial Officer
Re: Capital budgeting and risk analysis
You are required to conduct a risk analysis of the following new project, as outlined below. This new project involves purchase of a new laser cutting tool that can be used in Bathurst Metal Works' manufacturing division. The products manufactured using the new technology are expected to sell for an average price of $300 per unit, and the company analyst performing the analysis expects Bathurst Metal Works can sell 20,000 units per year at this price for a period of five years. To get started this business will require the purchase of a $2 million piece of equipment that has a residual or salvage value in five years of $200,000. In addition, Bathurst Metal Works expects to have to invest an additional $300,000 in working capital to support the new business. Other pertinent information concerning the business venture is as follows:

Initial cost of the equipment $2,000,000
Project and equipment life 5 years
Salvage value of equipment $200,000
Working capital required $300,000
Depreciation method Straight line
Depreciation expenses $360,000
Discount rate or required rate of return 12%
Tax rate 30%
In addition, estimates for unit sales, selling price, variable cost per unit and cash fixed cost for the base- case, worst-case and best-case scenario are as follows:
Base-case Worst-case Best-case
Unit Sales 20,000 15,000 25,000
Price per unit $300 $250 $330
Variable cost per unit $200 $210 $180
Cash fixed cost per year $500,000 $450,000 $350,000
Depreciation $360,000 $360,000 $360,000
i. Estimate the cash flows for the investment under the listed base-case value assumptions. Calculate the project’s NPV for these cash flows. (4 marks).
ii. Evaluate the NPV of the investment under the worst-case assumptions. (4 marks).
iii. Evaluate the NPV of the investment under the best-case assumptions. (4 marks).
iv. Explain how sensitivity and scenario analysis are useful for evaluating project risk? (1.5 marks).
v. How can break-even analysis be helpful in evaluating project risk? (1.5 marks).
Rationale
This assessment task covers topics 1 to 10 and has been designed to ensure that you are engaging with the subject content on a regular basis.
This will provide an opportunity to apply the concepts in an authentic scenario that you may encounter in the workplace and also:
• be able to evaluate and explain the congruence of accounting, finance and treasury functions.
• Be able to demonstrate specific technical competencies and skills in utilising quantitative techniques in financial analysis.
Marking criteria
Where necessary, state any assumptions you have made. Assignments should show all workings and students will be penalized for failing to do this.
Use the following marking criteria as guidance:
High Distinction Distinction Credit Pass Fail
Problem types/criteria (HD) (DI) (CR) (PS) (FL)

85% to 100% 75% to 84% 65% to 74% 50% to 64% 0% to 49%
Quantitative problems HD DI CR PS FL
Be able to demonstrate technical competency in calculating Cash Flow and Net Present Value.
Identify all the components to calculate Cash Flow and Net Present Value. Identify all components to calculate the Cash Flow and Net Present value correctly, with minor flaws. Identify all the components to calculate the Cash Flow and Net Present Value, with minor errors Identify all the components to calculate the Cash Flow and Net Present value with substantial errors. Fails to identify components to calculate the Cash Flow and Net Present Value. Does not demonstrate the ability to compute Cash Flow and Net Present Value, contains multiple and substantial errors.
Conceptual problems HD DI CR PS FL
Be able to analyse the elements in the business environment that affect Cash Flow and Net Present Value
Explicit and detailed analysis of all elements in business environment that affect Cash Flow and Net Present Value. Analysis of elements demonstrates a very broad and deep knowledge of the topic. Clear and detailed analysis of all elements in business environment that affect Cash Flow and Net Present Value Clear analysis of most key elements in business environment that affect Cash Flow and Net Present Value. Analysis lack explicit detail. Limited analysis of some elements in business environment that affect Cash Flow and Net Present Value No analysis of relevant elements, fails to make links to the specific business environment.
Financial technology HD DI CR PS FL
Use appropriate financial technology to gather information and conduct financial analysis.
Data used skilfully and demonstrates explicit integration into the analysis. The correct answers are derived using multiple relevant sources and the results are presented in a clear and professional manner. Data used competently and demonstrates integration into the analysis. The correct answers are derived using relevant sources and the results are presented in a clear and professional manner. Data sources used competently. Most correct results are derived using relevant sources but there may be some minor errors. Data sources used competently. Most correct results are derived using relevant sources but there may be some major errors. Data sources are not used competently. Most results are incorrect and derived using irrelevant sources. Contains major errors.
Analyse business situations HD DI CR PS FL
Reach reasonable conclusion and explain how sensitivity and scenario analysis are useful in project evaluation.
Quantitative and qualitative analysis is used persuasively and explicitly supports the conclusion. Quantitative and qualitative analysis is used in a clear and concise manner to make reasonable conclusion. Quantitative and qualitative analysis is used to make reasonable conclusion. Quantitative and qualitative analysis is used to make some conclusion. Quantitative and qualitative analysis is too simplistic or convoluted.
Financial research HD DI CR PS FL
Use of literature/market research/evidence of reading.
Has developed and justified own ideas based on a wide range of sources which have been thoroughly analysed, applied and discussed. Extensive reference list of resources used, correctly formatted using APA style. Literature is presented with soundly based criticisms, in a descriptive way and indicates a good understanding of the literature. Literature is presented with some criticisms, in a descriptive way and indicates a few limitations of understanding. Literature/market research is presented with some criticisms, in a descriptive way and indicates few limitations of understanding. Reference list used, formatted in APA style with minor errors. No evidence of literature or irrelevant to the research question.

Requirements
Assignments must be submitted through Turnitin. Please ensure you include your name and student ID in first page. Also include page number in the header or footer of every page of the assignment. Further details about submission are provided in Appendix 1.
As per the CSU Referencing Policy, each assessment item must indicate the style of referencing required for each task. Students should be directed to a single Guide that supports the required referencing style for each assessment task.

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