3.1. Capital Budgeting Decision Making (7 marks) Case Study: Assume that your group is working in Finance Department of a construction company. Your company is considering to invest in a 5-year project. Two options are recommended: Option 1: Build a new ocean-view apartment building on the Gold Coast. Option 2: Build a new residential quarter in the suburban area of Melbourne. Your companys Board of Management (BOM) is very concerned about the capacity to generate shareholder value and increase the return on the recent projects. The BOM has especially requested that your financial team recommend a project evaluation method to address the concern. The table below shows the estimated cash flows available for each option: Page 4 of 8 Option 1 Commercial building Initial Investment 2,500,000 Cash flow in Year 1 420,000 Year 2 560,000 Year 3 575,000 Year 4 656,000 Year 5 700,000 Option 2 Residential block 2,400,000 410,000 530,000 560,000 645,000 720,000 You are required to write a short report to the BOM in order: 1) To select a relevant method among 6 investment criteria for this project from: i. Net Present Value (NPV), HI5002 Finance for Business Group Assignment T3 2022 ii. Equivalent Annual Cost (EAC), iii. profitability Index (PI), iv. Internal Rate of Return (IRR), v. Simple Payback Period (SPB), and vi. Discounted Payback Period (DPP) Assume the given discount rate applied for all projects is xxx% (to be provided later) and the companys benchmark of payback is maximum 2.5 years. Your recommendations must include your justification why you choose the specific method based on: a) its pros and cons compared to other methods, b) the BOMs concern of efficiency and c) the financial circumstance of the company. (2 marks) 2) To perform the selected method and present the outcome of your project evaluation and recommendation, should the company choose the Option 1 or 2 for this project? Your justification must include calculation steps and numerical outcomes. (5 marks) Students are required to attend tutorial sessions to know how to work on these capital budgeting questions with correct discount rate, terminologies, templates and calculations. Details of explanation will not be provided in tutorial solutions. 3.2. Risk Analysis and Project Evaluation: NPV Sensitivity Analysis (8 marks) Case Study: Assume that your group is working in the Finance Department of a production company. Your company is considering buying a new assembly line for launching a new product. With the new assembly line, the company expects to sell 7,500 products/ year for an average price of $450 per Unit for 5 years. The new assembly line has: the initial cost of $1,850,000, and a residual value of $250,000 at the end of the project. The company will need to add $450 000 in working capital, which is expected to be fully retrieved at the end of the project. Other information is available below: Depreciation method: straight line Variable cost per Unit: $210 Cash fixed costs per year: $200,000 Corporate marginal tax: 30% Discount rate: xxx% Upon the forecast of unstable economic conditions, the BOM requires your Team to prepare a risk analysis for the case where: Unit sales decrease by 15% Price per Unit decreases by 15% Variable cost per Unit increases 15% Cash fixed cost per year increases by 15% Required: Do an analysis with cash flows of the project to determine the sensitivity of the project NPV with the above estimated changes in the value drivers and provide your results in relevant tables.