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BFA208 Financial Management Semester 2, 2017 UNIVERSITY OF TASMANIA Tasmanian School of Business and Economics BFA208 FINANCIAL MANAGEMENT Semester 2, 2017 Assessment 3: Written assignment Assessment: 20% Description: Your assignment involves preparing a written report where you will present an analysis of financial information relating to the capital investment project described in the attached case study and provide recommendations that will assist the firm in its decision making. Length: 1200 words maximum - this requirement refers to the written analysis section of the assignment only and is a \"maximum\". Students will not be penalised for using fewer words and making their report more succinct. If you submit over-length work there will be an automatic 10% penalty of the total possible marks for this assessment. Title pages, calculations section, reference lists and appendices are NOT included in the word count. Assessment Criteria: Please see the assessment rubric at the end of the assignment for information on the assessment criteria which will be applied when marking the assignment. Percentage Weighting: This assignment is worth 20% of the final mark for the unit. Due Date: Friday, 29 September, 2017 by 3 pm. Submission Information: Assignments are to be submitted through the assignment submission folder on the unit's MyLO site. There will be no paper submission. You may only submit your assignment once. A signed assignment coversheet should be downloaded from the assignment folder on MyLO and must be submitted. Assignments without a coversheet will not be marked. The date stamp on the electronic submission will determine if your assignment has been submitted on time. Late work will be penalised unless you have been granted an extension by the unit coordinator. See page 19 of the Unit Outline for more details regarding late assessment and extension policy. This is an individual assignment. Under no circumstances should you share your workings or any part of your assignment with other students - this constitutes academic misconduct and actions will be taken. All similarity reports on Turnitin will be thoroughly checked for matching with external sources and with other BFA208 assignments. You are asked not to discuss the assignment with other students on MyLO. You may ask general questions on MyLO if there is Page 1 of 7 BFA208 Financial Management Semester 2, 2017 something you need clarified but you should not discuss any calculations or where you have found any relevant information with other students. CASE STUDY The Bluebell Dairy Company Pty Ltd (Bluebell) runs a well-established cheese making business near Scottsdale in beautiful North East Tasmania. The business includes three dairy farms, a cheese factory and a caf where a range of breakfast and lunch meals, snacks and deserts are served. The milk processed in the cheese factory is supplied from the company's dairy farms as well as from a few other local dairy farms. Bluebell is specialized in the production of English style Cheddar cheese of various maturity and flavour for which it has won several awards. Its reputation is based not only on the quality of its cheese, but also on the sustainable farming system adopted on its dairy farms and cheese production methods. Bluebell sells some of its cheeses through its caf but the majority of its dairy products are sold on the mainland through fine food specialty shops and gourmet delicatessen. Due to the growing popularity of its products, Bluebell is currently considering exporting some its production to the North American and European markets. This will require a significant expansion of its existing cheese factory. Bluebell's management is assessing the investment project and have asked you to provide them with some advice about the financial viability of the project and possible sources of financing. The construction of the new cheese factory will take place over four months at the end of 2017. During the construction period, the existing cheese making facilities will not be affected and production of cheese and other dairy products will remained unchanged. However the caf will need to be closed for the duration of the construction. Sales from the caf over that period (from September to December 2017) are estimated at $120,000. Variable costs associated with the caf operation will not be incurred, however all fixed costs will remained unchanged. The total costs of expansion are estimated at $1,250,000 this includes the cost of construction of the new building, all fittings and machinery. In addition to the actual building and machinery costs, Bluebell has budgeted $200,000 in marketing costs to establish its European and North American markets. It is also estimated that the increased activity will require the immediate injection of an additional $250,000 in working capital (assumed at 31/12/2017). Bluebell is a proprietary company and the Board of directors is still unsure how the project should be funded. The main shareholders of the company are members of the founding family and most have indicated that they would be willing to contribute more equity to the company. The local bank with which Bluebell normally does business has given its in-principle agreement that it would be prepared to lend the company $600,000 over 5 years at a rate of 6%. The loan will be repaid by constant annual repayments payable at the end each year. Judith, the company CFO would like you help her examine the viability of the project for the next five years given two scenarios: an optimistic scenario and a realistic (conservative scenario). Given the risk associated with the project, she believes it is reasonable to use a cost of capital of 10% for Page 2 of 7 BFA208 Financial Management Semester 2, 2017 the evaluation of this project. Further financial data relating to the project can be found in the appendix. Your task Based on this information in the case study and in the appendix, Judith has asked you to write a report to Bluebell's Board of Directors advising them as to the best course of action regarding this project. Your report should address the following specific questions from the board of directors: 1. Discuss which costs are relevant for the evaluation of this project and which costs are not. Your discussion should be justified by a valid argument and supported by references to appropriate sources. 2. Estimate the depreciation costs (machinery and construction costs) associated with the project for each year for the period 2018- 2022. In your report you should justify the choice of a particular depreciation method over another. 3. Estimate the relevant annual net operating cash flows associated with the project for the period 2017- 2022 under each of the two scenarios envisaged by the CFO. You will need to broadly describe the method used for determining those cash flows and indicate any assumption (s) that may have to make. 4. Estimate the time when the initial investment will be paid back under each scenario. Assume in your calculation that working capital will be fully recovered at the end of the project but ignore the possible terminal value of other assets. Also ignore the time value of money. Briefly comment on your results. 5. Estimate the Net Present Value (NPV) of the project under each scenario assuming that the project is entirely funded by equity capital (Retained earnings and new share issue). Assume that annual cash flows are derived (or expended) at the end of each year. Also assume here that tangible assets (machinery + building) are worth $500,000 at the end of 2022 and that working capital is fully recovered. Briefly comment on your results and make appropriate remarks on the assumptions made for these calculations if necessary. 6. Assume now that Bluebell accepts the loan offer from the Bank and contributes the rest of the funds through equity contribution from existing shareholders. In the light of what was covered in your lecture and of your own research, briefly discuss whether the interest expense on the loan should be included in your cash flow estimates for the project. 7. Estimate the NPV of the project for each scenario under the above partial debt funding model? (use the same assumptions as in the fully equity case regarding annual cash flows and terminal value). Briefly comment on your results and compare with the results from your previous calculations. You may also wish to explain to the board of directors why the results differ or why they are similar. 8. Advise the board of directors as to whether they should go ahead with the investment project and if so, which funding model they should choose. In your recommendations, you may wish to suggest possible refinements in the method used for evaluating this project. Page 3 of 7 BFA208 Financial Management Semester 2, 2017 ASSIGNMENT INSTRUCTIONS Your assignment should be presented as a structured report with an introduction, a main body and a conclusion, but without inclusion of any calculations in the main body. The main body of the report may include headings addressing the specific questions asked by the board of directors. The final part of your assignment (answer to point 8 above) should include a general recommendation to the Board regarding the best course of action regarding the intended project. If you believe that further information is required before making a firm recommendation, you need to specify what information would be required. Any assumption that you may rely upon for your analysis and recommendation should be clearly stated in the main body of your report. All calculations should be presented in appendices to the report. Calculations may be prepared in an Excel document, however your submission must be in the form of a single Word document including the report itself and the appendices. All external sources used to support your argument should be appropriately acknowledged in the main body of your report using the Harvard style (Author -date) of referencing. This includes textbook sources but not the case study itself. A list of the full citations should be included at the end of the main body of your report. Page 4 of 7 BFA208 Financial Management Semester 2, 2017 APPENDIX: Additional information for the case Caf data Variable costs associated with the operation of the caf represent 40% of sales Fixed costs for the cafe are estimated at $8,000 per month Caf would be closed from 1 September 2017 until the end of 2017 Cost of expansion The $1,250,000 estimated costs of expansion can be broken down as follows: Construction of new factory: $400,000 Fittings: $200,000 Machinery: $650,000 For tax purposes, the machinery and fittings may be depreciated using either the prime cost or the diminishing value methods as set out in Division 40 of the Income tax Assessment Act (ITAA) 1997. The recommended life for assets used for cheese manufacturing is 15 years. (Tax Ruling 2017/2; Table A: industry categories). Judith indicated to you that the company will retain the method that is the most advantageous from a tax point of view, i.e. the depreciation method that maximizes its tax deductions. The construction expenditure of the factory may be depreciated for tax purposes at a rate of 4% per annum (Section 43-210 of ITAA1997) (only the prime cost method is available in this case). Marketing costs The $200,000 marketing costs associated with the expansion of the market will be incurred as follows: $50,000: during the last part of 2017 $50,000 in 2018 $25,000 for each of the following 4 years These costs are fully tax deductible in the year they are incurred (assume calendar year). Page 5 of 7 BFA208 Financial Management Semester 2, 2017 Sales projections Projections regarding additional annual sales of cheese from the expanded production over the next five years are as follows: 2018 2019 2020 2021 2022 Conservative scenario ($) 700,000 900,000 1,000,000 1,100,000 1,100,000 Optimistic scenario ($) 800,000 1,000,000 1,100,000 1300000 1,300,000 Operating costs Operating variable costs associated with the production of cheese are equal to 50% of the sale value of production. Existing annual fixed costs of production (excluding depreciation) are $400,000. As a result of the expansion these costs will increase by 20%. Existing administrative costs are $560,000 per annum. These costs will only increase by 10% as a result of the expansion. Tax rate The company is subject to a tax rate of 27.5%. -o-o-o-o- Page 6 of 7 BFA208 Financial Management Semester 2, 2017 BFA208: Financial Management_ Semester 2, 2017 Assessment rubric for Written Assignment (Assessment Task 3: 20% of final grade) Criteria HD (High Distinction) 90% - 100% 80% - 89% DN (Distinction) 70% - 79% CR (Credit) 60% - 69% PP (Pass) 50% - 59% Presents an argument that identifies relevant conceptual issues and critically evaluates most information in the scenario but with limited discussion of its relevance to the required analysis Identifies some relevant conceptual issues and critically evaluates some information in the scenario, but with limited discussion of its relevance to the required analysis. Relevant financial techniques applied are often identified and applied but with many mistakes in the application. Presents some analysis of the financial calculations. But the analysis is not always pertinent to the problematic in the scenario. Identify and explain the relevant theoretical issues that apply in the scenario. Determine the relevance of financial data and information in the scenario (weight = 20%) Presents a logical, reasoned and structured argument that identifies relevant conceptual issues and critically evaluates all information in the scenario while discussing its relevance to the required analysis. Presents a logical argument that identifies relevant conceptual issues and critically evaluates most information in the scenario with some discussion of its relevance to the required analysis Identify relevant financial techniques and correctly apply them to the situation in the scenario (weight = 40%) Relevant financial techniques are identified and always or almost always correctly applied. Relevant financial techniques are identified and mostly correctly applied. Relevant financial techniques are mostly identified and generally correctly applied. Present a pertinent analysis interpreting the meaning of financial calculations (weight= 25%) Presents a structured, reasoned and pertinent analysis of the financial calculations. The analysis is meaningful and assists with resolving the problematic in the scenario. Presents a structured and reasoned analysis of the financial calculations. The analysis assists with resolving the problematic in the scenario. Presents a reasoned analysis of the financial calculations. The analysis somewhat assists with resolving the problematic in the scenario. Communicate independently in clear and coherent English. Acknowledge sources using appropriate referencing (weight = 15%) NN (Fail) 0% - 49% Identifies some conceptual issues but not always relevant. Limited evaluation of the information in the scenario with limited or no discussion of its relevance to the required analysis. Financial techniques applied are not always relevant and /or there are many mistakes in the application. Limited analysis of the financial calculations. The analysis is of little use in resolving the problematic in the scenario. Adheres to English conventions making report easy to read. Mostly adheres to English conventions making report reasonably easy to read.. Occasionally adheres to English conventions report difficult to read. Acknowledges all sources and referencing is accurate and consistent Acknowledges most sources and referencing is mostly accurate and consistent. Acknowledges some sources and some referencing conventions are followed Page 7 of 7