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For Section 2, include screenshots or images of your MS Excel workings in your submission document, at the end of section (do not send or upload your MS Excel file).
Booty, an Australian company that makes boots, wants to make other footwear to sell in Australia. In Year 0, will raise and use an initial investment of AUD100,000 for this purpose. With a factory in Sydney, it will start one of two projects that will last up to Year 6: Project A, to produce flip-flops, or Project B, to produce women's sandals. It carried out market research. For Years 1-6, it projects revenues and costs as shown below. Subtract total cost from total revenue to get the cash flows you will use in your calculations (ignore taxes etc.): For this company, the hurdle rate is the weighted average cost of capital (WACC) plus 4% (WACC +4%). To calculate the WACC, use the following information: Questions 1. Begin by calculating the hurdle rate, report it, and use it for the rest of this section. If you are unable to do this, write "I cannot" and proceed to use a hurdle rate of 10% instead. 2. Evaluate NPVs, IRRs and payback periods (PP). Which project should it choose? Why? 3. Suppose that a third project, Project C, is available. The profitability index (Pl) of this project is 1.44. Comparing only the PI for all the projects, evaluate: which is now the most attractive project (ignore any negative signs in the PI values)? 4. Suppose the company plans to make and sell its product in Malaysia, Project D (see revenue, cost and exchange rates below). Subtract total cost from total revenue to get the cash flows (ignore taxes etc.) In Case 1 , the exchange rate remains at MYR/AUD = AUD0.32 until Year 6. In Case 2, the MYR declines by AUD0.01 every year starting from Year 3. The hurdle rate and initial investment remain the same (denominated in AUD). Assess: is this project profitable under Cases 1 and 2 ? Booty, an Australian company that makes boots, wants to make other footwear to sell in Australia. In Year 0, will raise and use an initial investment of AUD100,000 for this purpose. With a factory in Sydney, it will start one of two projects that will last up to Year 6: Project A, to produce flip-flops, or Project B, to produce women's sandals. It carried out market research. For Years 1-6, it projects revenues and costs as shown below. Subtract total cost from total revenue to get the cash flows you will use in your calculations (ignore taxes etc.): For this company, the hurdle rate is the weighted average cost of capital (WACC) plus 4% (WACC +4%). To calculate the WACC, use the following information: Questions 1. Begin by calculating the hurdle rate, report it, and use it for the rest of this section. If you are unable to do this, write "I cannot" and proceed to use a hurdle rate of 10% instead. 2. Evaluate NPVs, IRRs and payback periods (PP). Which project should it choose? Why? 3. Suppose that a third project, Project C, is available. The profitability index (Pl) of this project is 1.44. Comparing only the PI for all the projects, evaluate: which is now the most attractive project (ignore any negative signs in the PI values)? 4. Suppose the company plans to make and sell its product in Malaysia, Project D (see revenue, cost and exchange rates below). Subtract total cost from total revenue to get the cash flows (ignore taxes etc.) In Case 1 , the exchange rate remains at MYR/AUD = AUD0.32 until Year 6. In Case 2, the MYR declines by AUD0.01 every year starting from Year 3. The hurdle rate and initial investment remain the same (denominated in AUD). Assess: is this project profitable under Cases 1 and 2
