Assignment 1 – Trade plc (30%)
Trade plc is a major company in the hospitality sector. It has been considering the introduction of a new interactive game at one of its premises and it recently commissioned a firm of market consultants to carry out research at a cost of €170,000. The research company has estimated that the product will have a life of four years and target volumes and selling prices as follows:
Year 1 2 3 4
Customers 500,000 600,000 600,000 400,000
Selling Price Per Game €10 €11 €12 €10
You have been hired as an investment analyst to evaluate the viability of the new game and to recommend whether Trade plc should proceed with the product launch. You have also ascertained the following:
1. New equipment costing €1.5m will be required immediately. The equipment is expected to have scrap value of €0.3m. at the end of the project. Trade plc has a policy of depreciating machinery costs in its accounts at the rate of 25% per annum on a straight-line basis.
2. The new game will be introduced in an existing premises which is rented by Trade plc under a long-term lease. The premises is currently unoccupied and due to the surplus property available in the area it is expected to remain unoccupied for the foreseeable future. Current annual rent payable on the premises is €250,000.
3. Variable overheads are estimated at €1 per game.
4. Each game requires the use of some consumables. The cost for the first year is estimated at €5.50 per game and this cost is expected to increase by 10% per annum over the next four years.
5. Staff will be required to oversee and illustrate the technical aspects of the game. This cost is estimated at €2 per game and no wage increases are forecast for the next four years.
6. The marketing director plans to spend €200,000 in each of the first two years, promoting the game. Once the market has been established this spend will be reduced to €100,000 for each of the last two years.
7. Trade plc estimates that an additional €200,000 will be required for working capital, relating to storage of consumables and equipment.
8. Trade plc has a cost of capital of 12% per annum which it uses in evaluating all new capital projects.
9. Taxation may be ignored.
10. Calculations should be made to the nearest €’000.
11. Trade plc has a policy of requiring all projects to payback within a three year period.
1. Calculate the relevant cash flows to be used in evaluating the project. (50 marks)
2. Calculate the Payback Period. (10 marks)
3. Calculate the Net Present Value (10 marks)
4. Draft a brief report for the management of Trade plc, advising if it should proceed with the project and specifying the reasons for your decision. (10 marks)
5. Apart from the calculations above, suggest two non-financial factors that Trade plc should consider before proceeding with the project. (20 marks)
Total 100 marks
Assignment 2 – Finance (10%)
Referring to the new project in Assignment 1 (Trade plc), the Board of Directors has asked you to research ways of financing both the new equipment and the working capital required.
Write a report to the Board of Directors of Trade plc outlining the factors to be considered in each case and recommending appropriate sources of finance. (Maximum 400 words)
* Marks will be awarded on each assignment for workings and presentation.