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December 2009
ASSIGNMENT GUIDELINES
1. During your Structured Individual Study (SIS), you are required to answer each
(a) Your understanding of the theory you have learned (underpinning knowledge) and
(b) Your ability to apply it to real life/contemporary situations/case study (applied
knowledge).
Please follow the instructions below:
ASSIGNMENT REGULATIONS
Please refer to the HND Business student handbook given at the beginning of your
programme.
1. Alpha plc is planning to build production facilities to introduce a major new product at a
cost of $ 12 million.
The board of directors has already approved the project on the basis that it will yield a positive
NPV when discounted, over a ten year period, at the company’s market weighted average cost of
capital. The investment is expected to increase profit before interest and tax by approximately
25%.
1. A five year $ 12 million floating rate term loan from a clearing bank, at an initial interest
rate of 10%.
2. A ten-year € 16 million fixed-rate loan from the Euro-currency market at an interest rate
of 7%.
3. A right issue at a discount of 10% on the current market price. The company’s share price
is 170 cents.
The current summarized financial statements are shown below.
Summarized balance sheet as at 31st December 20X1
$000 $000
---------
40,219
----------
Financed by
Share capital:
Ordinary shares of 25 cents each
7,200
Managing Financial Resources and Decisions Date of submission 15th
December 2009
Reserves
19,813
Loan capital:
11% loan notes 20X4/20X7
13,166
---------
40,219
---------
Summarized income statement for the year ended 31st December 20X1
$000
Turnover 57,922
---------
Profit before interest and taxation 7,744
Debenture interest 1,448
---------
6,296
Taxation 3,148
---------
Now T1 T2 T3
Initial investment ($ millions) (1000)
The initial investment will be made on the first day of the new accounting period.
The selling price per unit is expected to be $100 and the variable cost $30 per unit. Both of these
figures are given in today’s terms.
Tax is paid at 30%, one year after the accounting period concerned.
The company has a real required rate of return of 6.8%.
General inflation is predicted to be 3% pa but the selling price is expected to inflate at 4% and
variable costs by 5% pa.
Determine the NPV of the project. (Work in $ millions).
Explain the importance of budget in pricing decision making.
2. Study the following financial statements for two very similar privately owned department
stores which comprise of one store in the city centre of a major UK city and then answer
the questions which follow.
Summary of financial statements
Balance sheets A B
£000s £000s £000s £000s
Fixed assets
Building at cost 300 440
Less depreciation to date (255) (220)
45 220
Equipment at cost 140 180
Less dep. to date (119) (90)
21 90
----- -----
66
310
Current assets
Stock 200 240
Debtors 205 140
Bank 4 2
------- -------
409 382
Less current liabilities
Creditors (245) (252)
164 130
------- -------
230 440
------- --------
_________ ________
Financed by:
Capital accounts
Managing Financial Resources and Decisions Date of submission 15th
December 2009
1. The directors of Axis Ltd. are currently considering two mutually exclusive investment
projects. Both projects are concerned with the purchase of new plant. The following data
are available for each project:
Project 1 Project 2
£ £
Cost (immediate outlay) 100,000 60,000
Expected annual net profit (loss):
Year 1 29,000 18,000
Year 2 (1000) (2000)
Year 3 2,000 4,000
Estimated residual value 7,000 6,000
The business has an estimated cost of capital of 10% and employs the straight line
method of depreciation for all fixed assets when calculating net profit. Neither project
would increase the working capital of the business. The business has sufficient funds to
meet all capital expenditure requirements.
Required:
(a) Calculate for each project:
i. The net present value
ii. The approximate internal rate of return
iii. The payback period.
(a) State which, if any, of the two investment projects the directors of Axis Ltd. should
accept, and why?
(b) State, in general terms, which method of investment appraisal you consider to be
most appropriate for evaluating investment projects and why?
Managing Financial Resources and Decisions Date of submission 15th
December 2009
Syllabus
To achieve each outcome a learner covered
must demonstrate the ability to: