Brexylite plc, a UK medium sized listed firm manufactures handheld games consoles. In recent years the directors, headed by the Chief Executive Officer Mr Tanaka, have stated that the business has reached limits of development in its present form. Future development requires large-scale expansion to compete with the existing and emerging companies.

The directors have investigated several possibilities, deciding eventually to expand their production facilities and establish their own distribution system so that their newly 'branded' products can be sold in independent, quality retailers around Great Britain, Europe, and USA. You have been assigned the responsibility of evaluating the purchase of a new machine to produce a new gadget (Pro-3). The product has a four-year product life cycle. The company has spent 300,000 on market research during the past year. The machinery is expected to cost 8 million. The company spent 30,000 on consultancy fees last year.

Production and sales of Pro -3 consoles are forecast to be as follows:

Year	1	2	3	4
Production & sales(units/year)	420,000	650,000	780,000	480,000

The unit sale and unit variable cost of the (Pro-3) product will create a contribution of 10 per unit. Contribution per unit is expected to rise by 5% per annum. All the increased production will be exported in approximately equal proportions to Eurozone and USA. Thus, the firm will have some cash flows denominated in Euro, , and $USA and the contribution figure given above is the sterling equivalent of these cash flows at current exchange rates

An increase in fixed rent costs of 100,000 per annum is expected since Brexylite plc has no spare capacity in space and will rent additional premises. The rent fee is not subject to inflation. Professional fees of 50,000 will be incurred at the first year of the project (not subject to inflation). Marketing fees of 60,000 per annum will be incurred. This is subject to an annual inflation of 1%. Labour cost will be 9/hr and each unit produced will require half an hour of labour time.

Producing and selling Pro-3 will require investment in working capital of 1.5m in T0. The working capital will be recovered at the end of the project.

Brexylite plc incurs corporation tax charges of 20% per year. Tax lability is paid one year in areas. Tax will be applied on the operating cash flows, after all expenses have been deducted but will not include the working capital and residual values. Liability to tax will not currently be reduced by capital allowances on new machinery. The new machine is expected to have 500,000 future scrap value at the end of the four-year period.

Brexylite plc uses WACC as the discount factor for investment appraisal purposes. Any new venture would be expected to achieve a maximum payback period of 4 years, together with a minimum Return on Capital Employed of 20% (using the average investment method of calculation)

The following information is available regarding how the Brexylite Plc is currently financed:

Ordinary Share Capital:

Brexylite plc has 20m ordinary shares in issue and each is trading at 108p ex- div. A dividend of 12p per share has just been paid. The dividend growth varies each year. The beta for Brexylite Plc is 0.85, T-Bills are offering 3.5%. The FTSE all index return is 13%.

Preference Share Capital:

The balance sheet indicates that 2m of preference capital has been issued. They are shown as 5% 0.50 shares. Current share price is 25p per share.

Debt Capital:

10% debentures are due to mature in 4 years at par. The current market value of each debenture is 108, and the total book value of the debentures is 5m.

8% irredeemable bonds are trading at 97. The interest has just been paid. There are 2m nominal value worth of irredeemable bonds, as per the statement of financial position.

The corporation tax rate applicable is 20%.

To raise the funds required for investment on the new machinery and expansion, the board of directors will consider either increasing borrowing or an issue of new shares. The United Kingdom government is currently renegotiating new trade arrangements with the European Union and a few other countries, and the performance of Pro-3 product will depend on the outcome of those negotiations. If the UK government can obtain favourable trading terms, then the sales cash flows from the project could be higher than the current ones. There is, though, a small chance that trade terms will be unfavourable resulting in sales cash flow being marginally less than projected ones

Required

You are required to produce a written business report in which you evaluate the investment proposal on behalf of Brexylite Plc and advise the firm whether the project is acceptable on a financial basis. Also, comment on the potential impact of foreign exchange risk on the project. Your report should discuss and recommend alternative sources of financing the project. You should support your arguments with relevant theory and calculations and indicate any non-financial matters you feel should be taken into consideration.

Your answer should be presented in the form of a report of 2000 words total (excluding

the reference list). You must also submit a separate Excel spreadsheet containing your

calculations.

Further guidance

You are required to apply a range of methods to carry out the investment appraisal of the project. Your report should

i) Provide and evaluate the robustness of your findings, referring to appropriate theory in investment appraisal, cost of capital and risk.

ii) Discuss sources of finance that could be considered for the project and their possible impacts.

iii) Explore the non-financial factors management would need to consider in addition before making a final decision on the project.

iv) Explore currency risk and how this can be mitigated, comment on the potential impact of foreign exchange risk on the project

Only relevant cash flows, which are the incremental cash flows arising as the result of an investment decision, should be included in the investment appraisal.

Relevant cash flows include opportunity costs and incremental investment in working capital.

You are required to also submit a working excel sheet with all the cashflows, workings of Cost of capital, NPV, IRR, Payback, ROCE.

Submission requirements:

You should use Arial font size 12 and 1.5 line spacing. Exceeding the word count by 10%

or more or deviations from the formatting instructions will attract a penalty of up to 5 marks

The hand-in deadline for submission is 23.59 on 17 April 2022.

For deferred coursework, submissions up to 24 hours late will attract a daily late 10% penalty. Reports submitted more than 5 days late will attract a mark of zero.

Submit one electronic copy via Studynet/Canvas as a Word file. In addition, submit an Excel

spreadsheet containing your calculations.