Cloudstreet Ltd is an Australian firm which is publicly-listed on the ASX. The company has a long term target capital structure of 60% Ordinary Equity, 10% Preference Shares, and 30% Debt. All of the shareholders of Cloudstreet are Australian residents for tax purposes. To fund a major expansion Cloudstreet Ltd needs to raise a $120 million in capital from debt and equity markets. Facilities management have produced the following budget on a factory refurbishment and technology upgrade which will cost an initial capital outlay of AUD$17.5 million. The existing plant and equipment will be sold for salvage and is expected to have a salvage value of $400,000. The existing equipment has a zero written down value in the accounts having been fully depreciated over its life. The upgraded facility will be ready for use at the commencement of the 2019-20 financial year. The upgrade will result in a 20% cut in power usage which represents a saving in electricity costs of $25,000 per week and an annual saving of $600,000 in water costs. The use of advanced robotics mean that less direct labour is required and labour savings and on-costs will amount to $2.5 million per annum. It is estimated that the cost of training staff to operate the new production line will amount to $750,000 which will be incurred before the new facilities come on-line. This cost is expected to be recorded as labour costs in the 2019 financial year. Extra maintenance of the new information technology (IT) and robotics is estimated to cost approximately $4,000 per week. The new production facility will be depreciated on a straight line basis over its 10 year life cycle to zero. Because of anticipated technology changes the production facility is expected to have a salvage value of $1 million at the end of 10 years. Mars are an international company and pay Australian tax at the rate of 30% on profits. The capital budgeting analysis should be conducted on an after tax basis. For the purpose of this analysis, tax should be recognised in the same year as the cash flow generating activity. The upgrade will increase the production capacity of the original factory by 50% and all costs other than Raw Materials will now be fixed. Whilst the proposed refurbished facility will achieve many facets of the Mars sustainability agenda the project must still pass the companys international benchmark for capital investment of achieving a return of 20%. (i) Prepare an excel spreadsheet calculating whether this product will satisfy the investment parameters set by Mars. For the proposed Nutty Nut capital investment calculate the following (using formula and worked out solutions): After-tax cash flows (15 marks) Payback period (3 marks) Net present value (5 marks) Profitability index (2 marks) (ii) You are asked to present a report on your findings regarding the upgrade proposal. Make a recommendation to Management on whether they should proceed with the upgrade or not. Explain the criteria on which you have based your decision and ensure that you include an analysis of the strategic implications of some of the cost assumptions which underpin the budget. (10 marks) (iii) The closure of a Mars product line at their Ballarat site has left the company with an unoccupied manufacturing facility. Two projects have been proposed to use the space and the following estimates of the present value of the competing project cash flows have been made: Chocolate Ice cream Net Present Value $25,000 $32,000 Estimated useful life 6 years 9 years (a) Explain how financial managers may evaluate two mutually exclusive projects that are of unequal lives. (10 marks) (b) Assuming a required rate of return on projects of this type of 12%, decide which project you think the company should accept (show all workings). (5 marks)