is the fledgling company, which has raised $15 million of capital The company has paid $500,000 to a consultant firm for purposes of providing the company with investment options in the computer chip production industry.

The consultants have provided the following two options for Aussie HiTechs consideration.

Option A: Joint Venture with a Taiwanese Manufacturer

In this option, the business would team up with the Taiwanese Manufacturer (TSM Co.) to develop and produce computer chips. TSM Co. is well established in the field. Aussie HiTech Pty Ltd will be required to invest $15,000,000 into the joint venture. The business agreement is 5 years.

Option B: Green Field: set up the manufacturing site from scratch in Clayton

This option would require Aussie HiTech Pty Ltd to set up the manufacturing site from scratch in Clayton, Victoria, Australia. They would need to lease the manufacturing site and purchase necessary equipment and intellectual property from overseas. It means that they would have to abandon all other small projects which currently generate $100,000 profit before interest and depreciation per year collectively.

The set-up cost for this project is $30,000,000, they need to borrow 50% of this amount from the bank. They have guarantees from the government so interest is only at 2%. Part of the government funding also lets them pay interest only for 10 years. The principle is to be paid at year 10 either by Aussie HiTech or the government to the bank.

New engineers and other experts will be hired to run this operation.

The estimated financials for the two projects are provided below.

Following information is for both Options:

Aussies Pty Ltd Project Budgeted Income Statement
	Option A ($)		Option B ($)
	Year 1-5		Year 1	Year 2-10
Revenue
Sales	7,000,000		0	17,000,000
Total Revenue	7,000,000		0	17,000,000
Expenses
Wages	500,000		1,000,000	2,000,000
Depreciation	1,000,000		3,000,000	3,000,000
Marketing	100,000		200,000	200,000
Interest			300,000	300,000
Production cost			200,000	3,000,000
Consultant Fees	500,000		500,000
Rent			200,000	200,000
Total Expenses	2,100,000		5,400,000	8,700,000
Total Profit (Loss)	4,900,000		-5,400,000	8,300,000

The cost of capital of 12%

a) is the fledgling company, which has raised $15 million of capital The company has paid $500,000 to a consultant firm for purposes of providing the company with investment options in the computer chip production industry.

The consultants have provided the following two options for Aussie HiTechs consideration.

Option A: Joint Venture with a Taiwanese Manufacturer

In this option, the business would team up with the Taiwanese Manufacturer (TSM Co.) to develop and produce computer chips. TSM Co. is well established in the field. Aussie HiTech Pty Ltd will be required to invest $15,000,000 into the joint venture. The business agreement is 5 years.

Option B: Green Field: set up the manufacturing site from scratch in Clayton

This option would require Aussie HiTech Pty Ltd to set up the manufacturing site from scratch in Clayton, Victoria, Australia. They would need to lease the manufacturing site and purchase necessary equipment and intellectual property from overseas. It means that they would have to abandon all other small projects which currently generate $100,000 profit before interest and depreciation per year collectively.

The set-up cost for this project is $30,000,000, they need to borrow 50% of this amount from the bank. They have guarantees from the government so interest is only at 2%. Part of the government funding also lets them pay interest only for 10 years. The principle is to be paid at year 10 either by Aussie HiTech or the government to the bank.

New engineers and other experts will be hired to run this operation.

The estimated financials for the two projects are provided below.

Following information is for both Options:

Aussies Pty Ltd Project Budgeted Income Statement
	Option A ($)		Option B ($)
	Year 1-5		Year 1	Year 2-10
Revenue
Sales	7,000,000		0	17,000,000
Total Revenue	7,000,000		0	17,000,000
Expenses
Wages	500,000		1,000,000	2,000,000
Depreciation	1,000,000		3,000,000	3,000,000
Marketing	100,000		200,000	200,000
Interest			300,000	300,000
Production cost			200,000	3,000,000
Consultant Fees	500,000		500,000
Rent			200,000	200,000
Total Expenses	2,100,000		5,400,000	8,700,000
Total Profit (Loss)	4,900,000		-5,400,000	8,300,000

The cost of capital of 12%

a) Calculate the ARR for option B only, you can use the following table format to fill your answer

Items	Workings
Investment (O/bal)
Investment (C/bal)
Average investment
Average profit
ARR

b) Calculate the net cash flows for purposes of NPV evaluation, of Option B only, you can use the table format below to fill in your answer:

Time	Net Cash Flow	Workings
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10

c ) The following is the calculation for NPV for both options, calculate EAA for each option and make a recommendation for Aussie HiTech, on which investment should be selected?

	Option A	Option B
I	12%	12%
N	5	5
NPV	$13,070,568	$21,496,784
EAA
Recommendation