Assessment 3: Business Case Studies 2 ACC00716 S1 2018
ACC00716 Finance Session 1, 2018
Assessment 3: Business Case Studies 2
Due date: 20 May 2018, 11PM
This assignment has a 25% weighting in your overall mark for this unit and focuses on content from Weeks 6, 7 and 8. The assignment will be marked out of 25 and marks will be allocated as indicated in the rubric below. Your total assignment submission will consist of a word document that should not exceed 1,000 words (excluding reference list), plus a spreadsheet submission.
The assignment is based on the hypothetical case information below.
Pinto Limited has recently been subject to significant competition from overseas manufacturers with much lower costs. To combat this, Pinto is considering a project that will see it move into a new product market considered riskier than its current operations. The CEO has asked you to undertake a financial analysis of the proposed project and present your recommendations in a short memo. As part of your financial analysis you will calculate NPV, IRR, payback period, discounted payback period and profitability index.
The project requires an upfront investment in plant and equipment of $15 million, which will be depreciated on a straight-line basis over the five-year life of the project. The equipment is not expected to have any significant salvage value at the end of its depreciable life.
Pinto paid $25,000 in fees to consultants for a market analysis related to the project. This analysis predicted sales volume of 200,000 units in the first year, which would grow by 50% per year in years two and three, and fall by 50% in each remaining year as demand wanes. Selling price in the first year is expected to be $75 and grow by 3% each year after that.
Pinto’s operations manager has estimated cost of goods sold for the project will equal 60% of sales revenues and selling, general and administrative expenses directly related to the project (excluding depreciation) will be $1 million in the first year and increase by 5% per year thereafter. The operations manager has not included in his estimates any cost for a project operations base because the plan is to use a building the company already owns. Currently Pinto rents this building to another company for $250,000 per year.
The project will require an upfront investment in net working capital equal to 20% of the year 1 sales revenue forecast. This investment in working capital will be fully recovered at the end year 5.
The company has a 10% weighted average cost of capital and is subject to a 30% tax rate.
Required: Prepare (1) a spreadsheet financial analysis of the proposed project and (2) a memo to Pinto’s CEO that briefly explains and justifies your chosen methods and any assumptions made, summarises your findings, and presents your recommendations on the proposed project.
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Assessment 3: Business Case Studies 2 ACC00716 S1 2018
MARKING CRITERIA Excellent Very Good Good Poor Very Poor
Accurate estimation of relevant base case project cash flows
(10 marks) All relevant base case cash flows have been accurately incorporated into the analysis and net cash flows are correct. (10 marks) Nearly all relevant base case cash flows have been accurately incorporated into the analysis. (8 to 9.5 marks) Most relevant base case cash flows have been accurately incorporated into the analysis. (5 to 7.5 marks) Some relevant base case cash flows have been accurately incorporated into the analysis. (3 to 4.5 marks) No or very few relevant base case cash flows have been accurately incorporated into the analysis. (0 to 2.5 marks)
Accurate calculation of decision criteria (2.5 marks) All required decision criteria have been accurately calculated based on your net cash flows. (2.5 marks) Nearly all decision criteria have been accurately calculated based on your net cash flows. (2 marks) Most decision criteria have been accurately calculated based on your net cash flows. (1.5 marks) Most decision criteria have been inaccurately calculated. (0.5 to 1 mark) No decision criteria have been accurately calculated. (0 marks)
Accurate and appropriate analysis of uncertainty (5 marks) You have accurately analysed project uncertainty using appropriate techniques covered in the unit. You have shown insight by being selective in the analysis and assuming reasonable parameters. The analysis is easy to follow. (5 marks) You have analysed project uncertainty using appropriate techniques covered in the unit. There are some minor inaccuracies in your analyses and/or unreasonable parameters. The analysis is easy to follow. (4 to 4.5 marks) You have analysed project uncertainty using at least one appropriate technique covered in the unit. There are some inaccuracies, unreasonable parameters and/or the analysis is not easy to follow. (2.5 to 3.5 marks) You have analysed project uncertainty using at least one appropriate technique covered in the unit. There are major inaccuracies, unreasonable parameters or the analysis is not easy to follow. (1 to 2 marks) You have not analysed project uncertainty using appropriate techniques or have attempted to use at least one appropriate technique but it contains major inaccuracies
and unreasonable parameters and is difficult to follow. (0 to
0.5 marks)
Appropriate
interpretation and recommendations based on the project analysis
(7.5 marks) You have accurately interpreted the results of your financial analysis and made appropriate and insightful recommendations with the basis of those recommendations clearly and concisely explained.
Recommendations go further than simply accepting or rejecting the project by recognising the subtleties of project decision making and needed additional analysis or considerations. Use of language makes meaning consistently clear; no or very few grammar, syntax and spelling errors. (7 to 7.5 marks) You have accurately interpreted the results of your financial analysis and made appropriate recommendations.
Recommendations go further than simply accepting or rejecting the project by recognising some subtleties of project decision making and/or needed additional analysis or considerations. Use of language mostly makes meaning clear; no or very few grammar, syntax and spelling errors. (6 to 6.5 marks) You have accurately interpreted most of the results of your financial analysis and made some appropriate
recommendations. Subtleties of project analysis and decision making have generally not been recognised. Use of language mostly makes meaning clear; several grammar, syntax and spelling errors. (4 to 5.5 marks) You have accurately interpreted some of the results of your financial analysis and made at least one appropriate recommendation. Use of language often makes meaning unclear; several
grammar, syntax and spelling errors. (2 to 3.5 marks) You have not correctly interpreted most results from
your financial analysis. No recommendations have been made or recommendations do not follow from the results or interpretation. Use of language mostly makes meaning unclear; many grammar, syntax and spelling errors. (0 to 1.5 marks)
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