Corporate Office Ltd, trading as COL, is a public company listed on ASX. It provides a wide range of support services to businesses of all sizes and types across Australia, New Zealand, and the South Pacific. Such services include but are not restricted to:

• provision of staff to backfill in emergencies
• office fit outs
• provision of office furniture, both for sale and for rental
• rental of office machines
• consulting on office set up

One area where COL has a strong presence is that of renting ‘All-in-one’ office machines to small or new start-up businesses. This service is a package of an entire office setup and is marketed under the name A1. They may customize the service to the selected product as well. Given the continuous technical advancement and high hardware procurement, maintenance, and consumable costs, for small/start-up businesses, rental rather than purchase is a better business proposition. The service that COL offers means that the machines rented under A1 are fully supported with service provided within 12 hours. For example, a replacement printer will be installed within that time frame if the printer cannot be made fully operational in that time span. All consumables for the machine are also provided. The service that COL sells is not cheap, but it is seen by many small businesses as well worth the cost.

To date, COL offered a few options for each type of office machine (printers, desktops, monitors etc) to serve its clients. However, COL’s inventory management department has reported wastage from the less popular models. COL had to find a solution and ways to be more efficient. Going forward, the Board of Directors at COL decided to offer only one brand of each type of office machine it offers under A1.

It is October 2021, and COL must decide which brand of printers under A1 they will commit to for 2022 and beyond. It has undertaken thorough market research and has narrowed the choice to two highly reputed and popular brands: Jupiter Dimensionals (JD) and Zeus Productions (ZP). This market research incurred a cost of $60,000. Both the brands offer printers in two sizes: small and large however, the models have different life spans. While JD Printers last for 5 years, ZP printers have estimated life of 3 years. Further, once the decision is made, COL also plans to clear their entire stock of existing inventory related to printers and related items. The book value of these items is $200,000 and fortunately, they have found a vendor to take their existing inventory at this amount. For any storage needs, COL already has access to existing warehouses across Australia for which it pays annual rent of $50,000.

Currently, COL has identified 560 small/new start-up businesses from its client base who might be interested in their new printers. They expect 40% of these clients will subscribe to the large model and the remaining 60% the small printers. COL will also order 5 extra units of each printer size as spare/stand-by for the emergency repairs and staff training. COL will procure the number of printers and associated consumables accordingly from the vendor.

Both JD and ZP require staff involved with their products must undergo one-time training before the products are launched. Each company charges each trainee on a per product training basis. Included in the package for COL is the deal that the staff will be trained and continuously updated with the product features throughout the life of the product. COL will deploy 10 employees to look after the printer division in the business. These employees have been the fulltime staff members of COL for years now and are on a current annual salary of $70,000 each. Salary rises in the past few years have been at an average of 1% per annum. The training fee per staff member per product model for each product is given in the Table – A.

Though the new printers come with initial sample cartridges, they do not last long. COL anticipates each of these clients will need full cartridges during the year. Keeping that in mind, COL made an agreement with the vendors to provide such consumables on an ongoing basis till the life of the printer. For this purpose, they have secured good rates and have estimated the yearly price per client as shown in the Table A below. COL will order these cartridges at the beginning of the year in advance.

Further, the rental charged for these models naturally depends on the make and size of the printer selected by the client. Having considered all the relevant costs, and the profit margin, COL has determined the monthly rentals it plans to quote to each of these clients.

These printers are to be depreciated to zero value during the period of their useful lives using the straight-line method. At the end of their life, all the printers, including the spare ones, shall be scrapped at the estimated salvage value for each type.

COL plans to increase monthly rental by 5% each year and the vendors will increase the consumable cost by 3% per annum in line with the inflation rate.

The applicable company tax rate for COL is 30%.

The following table summarizes the key financial data related to these two brands:

Table – A: Details of Arrangements with the two vendors

Details	JD		ZP
	Small	Large	Small	Large
Cost (Purchase per unit)	$ 1,950	$ 4,550	$ 1,515	$ 2,250
Consumables (per year)	$ 160	$ 250	$ 90	$ 200
Training (per staff)	$ 500	$ 500	$ 350	$ 350
Rental (monthly)	$ 65	$ 120	$ 60	$ 110
Salvage Value (per unit Average Life (years)	$ 100	$ 150	$ 74	$ 85
	5		3

COL is a publicly listed company, and the table below provides some capital sourcing details from the most recent Balance Sheet. Additional notes are also provided related to its Capital sourcing:

Table – B Excerpts from the Balance Sheet of COL as of 30 June 2021

Bank Loan	$3,000,000
5% Coupon Bonds (issued @$1000 each)	$14,060,000
Common stock (14,250,000) issued @ $2 each	$28,500,000

Additional Information:

• The current interest on the bank loan is 3.5% with daily compounding. COL is on track to pay off the entire loan at its maturity in December 2025.
• The most recent trading price for Bonds is $990 in the Debt market. They pay coupons semi-annually on 30^th June and 31^st December each year. The bonds will mature on 31^st Dec 2030.
• Common stock is currently trading at $2.5 per share. The average expected return on the Market is around

7.5%. The current risk-free rate is around 1.3%. Its Equity Beta is 1.20.

REQUIRED:

With the given information regarding the sources of funds, estimate the Weighted Average Cost of Capital (WACC) for Corporate Office Limited.

1. Using the WACC you have established for COL Ltd (round it to the nearest integer), undertake an NPV analysis of the two alternatives COL has regarding the vendors for printers.