Capital Budgeting

Part A (5 marks)

Telstra is considering leasing 6 new branches in shopping centres around Melbourne. Each branch is expected to start earning $10,000,000 of revenue in the first year of operation, growing by 15% per annum. Variable operating costs start at 35% of the first annual revenue, increasing by an additional 0.5% of annual revenue, each year after. Annual, fixed costs per branch is $3 million p.a., starting at the same time as variable costs. The leases will expire in 6 years, after which the branches will cease to operate. At the end of the lease, staff will be made redundant, costing Telstra half the final year revenue. Setup costs now for each branch is $11,000,000 each.

35% of Telstra capital is financed through equity which has a 3.5% premium on the 8% that capital creditors earn. Calculate the discount rate, NPV and IRR of this project.

Part B (5 marks)

In an independent project, Telstra is also currently considering using virtual shop assistants and automated checkout kiosks that will eliminate the need to staff the 6 new branches. The equipment and software is expected to cost 85% of setup costs for each branch now. This will save 30% of variable operating costs each year and 10% of fixed costs each year, as per part A.

The capital structure of Telstra remains unchanged from part A. Calculate the discount rate, NPV and IRR of this project, using the project cash flows specified in this part only. Note: This project is contingent on the project in part A going ahead. If the part A project does not go ahead, neither will this project here.

Part C (3 marks)

Telstra treasury has come up with updated cash flow forecasts for 6 branches proposed in Part A. The setup cost for each branch falls by $500,000 and the staff redundancies cost is expected to rise to 63% of final year revenue. The cost of equity premium over capital creditors increases by 1%. There are no other changes to capital budgeting estimates of the project. (Part B is unaffected by any changes here.)

Re-calculate the discount rate, NPV and IRR of the 6 new branches.

Part D (4 marks)

Prior to the treasury updates, what is the resulting NPV of BOTH 6 new branches and the staff automation project? What is the most appropriate recommendation regarding the projects to maximise NPV? (Should both projects be taken, or only one or the other?)

After the treasury updates, what is the resulting NPV of BOTH 6 new branches and the staff automation project? What is the most appropriate recommendation regarding the projects to maximise NPV? (Should both projects be taken, or only one or the other?)

I need this right now, please answer quickly, thank you