Lock Limited is an Australian listed company (hypothetical) that designs door and window hardwareandsellsitsdesignstoothercompanies.Thecompany'sBoardofDirectorsisundermountingpressurefromshareholderstoimproveperformanceoutcomes.SharepricesanddividendsareshowninTable1, while Table 2 provides market index data. In each table, the year end is December. Other capitalmarketinformationatthepresent timeis presented inTable3.

Table1:LockLimitedsharepriceanddividendhistory

Year	Closingshareprice($)	Dividendpershare($)
2017	8.21	n.a.
2018	6.83	0.10
2019	8.55	0.12
2020	9.20	0.12
2021	10.38	0.12
2022	9.64	0.12

Table2:Marketindexhistory(AllOrdinariesindex)

Year	Closing price index(points)	Closing accumulatedindex(points)
2017	6167.29	60007.77
2018	5709.44	57887.91
2019	6802.40	71813.87
2020	6850.61	74424.55
2021	7779.21	87626.08
2022	7221.69	85033.52

Source:S&P Global

Table3:Currentcapitalmarketinformation

YTMon10-yearAustraliangovernmentbonds:	4.00%
Long-termaveragemarketriskpremium	6.00%
Beta:
LockLimited1	1.25
Industry	1.10

¹Basedon amorecompletedatasetthanshownin Tables1and2.

LockusesnodebtandsoestimatesitscostofcapitalwiththeexpectedreturnonitssharescalculatedusingCAPM. Companypolicy specifiesuseof thecostof capitalforprojectevaluation.

Lock'slatestwindowlockdesign

Lock has spent $500,000 over the past six months developing a new window lock design, which thecompany has now patented. Last week, Lock received an offer from Global Corporation Limited tolicense the design patent for five years. Global would pay a $1 million licensing fee per year, payableattheendofeachyear.IfLockwastoacceptthisoffer,itwouldneedtospend$200,000immediatelyonlegal andadministrativecostsitwouldnototherwiseincur.

In the past, Lock has not manufactured and sold products itself, instead selling or licensing its designpatents to other companies, like Global Corporation. Nevertheless, for this design, Lock has beeninvestigating if they should manufacture and sell the lock themselves. So far, this investigation hasinvolvedhiringanexternalconsultingfirmtoprovideLockwithaproductionandsalesplan.Lockpaid

$250,000uponreceivingthe plan twoweeksago.

Basedonexpectedcompetitiveconditions,theconsultant'splanrecommendsonlyafive-yearperiodformanufacturingandsellingthewindowlock.Theplanforecastsannualsalesvolumeof50,000unitsin the first year of the project and this is expected to grow by 10% in year two, and fall by 20% peryearineach remainingyear.Theconsultantsrecommenda sellingpriceof$195per unit.

Intermsofoperatingcostestimates,theproduct'scostofgoodssoldwillbe50%ofsalesrevenueandselling, general and administrative expenses (excluding depreciation) will be $1.5 million in the firstyear and increase by 4% per year thereafter. Lock's Operations Manager has considered variouslocations where product manufacturing might take place. Her recommendation is the use of factoryspace Lockowns butcurrently rents for$300,000 peryeartoanother business.

Equipment will have to be purchased before manufacturing of the product can commence. Quotesindicate this will cost $3 million. The equipment will be depreciated at a prime cost rate of 15% perannum for tax purposes and be sold at the end of the last year of the project for an expected $2million. Lock will also need to invest in net working capital. The balance of net working capital willneedtobe25%ofeachupcomingyear's salesandreduced tozeroattheendoftheproject.

Lock pays income tax at a rate of 30%. For project analysis purposes, assume all taxes are paid(credited) at the end of the year to which they relate and Lock is not eligible for any research anddevelopmenttax deductions.

Your tasks: (1) Evaluate the firm's risk and return measures compared to the market, and (2) Evaluate projects and make recommendations. All project decision criteria metrics taught in this unit should be calculated. You will also provide a spreadsheet to back up the numbers in the document.