It is $31$th December $2023.$

Your team of seven people form a financial analysis team at Aussie Finance Consulting $($AFC$),$ a renowned financial institution. The executive management of AFC has assigned you a task to carry out a special project for its client Victorian Telecomm Limited $($VTL$),$ which requires preparing a business report. This report will be presented to AFC executive management and also to the senior management of VTL$.$

VTL is an Australian telecommunications company. They provide a full range of telecommunication services to corporate and government customers including fixed line voice, data networks and mobility services through a range of carriers offering choice, control and cost reduction. VTL has been in the business for $20$ years now. It is well established and profitably running business thus far. VTL has recently undertaken a market study which costed them $$50,000.$ Findings of the study indicate that it is critical for VTL to upgrade their infrastructure to meet the demand of its customers. They plan to do the upgrade systematically in stages gradually over an extended period, anticipating an annual revenue increase of $$10,000,000$ as a result. For the upgrade, they need some critical hardware components. The management has identified two options: $(1)$ In$-$house production which requires the company to establish their own production facility; and $(2)$ Outsourcing which implies external procurement of the necessary hardware.

Option $2$: Outsourcing

Alternatively, VTL can contract with a firm named Innovative Equipment Limited $($IEL$)$ which is specialised in manufacturing the required hardware. Based on the types and expected number of units VTL would need, IEL management has quoted a total cost of $$3,000,000$ in Year $1$ which will continue to grow at $7\%$ per annum to keep up with the rising cost and forecasted growth in the number of the required units. IEL, however, has offered this rate on a condition of a five$-$year contract. Also, IEL requires that VTL pays $63\%$ of the expected cost for a year in advance at the beginning of that year. From the accounting perspective, equipment that are procured from IEL may be classified as cost of goods sold in the books of VTL$.$ Hence, they will be treated as operating expense for the business.

You are required to analyse the two given options and make recommendations to VTL about the option they should choose.

For the purpose of the analysis, you have already assembled the following information:

Additional information

$$ The bonds are currently priced at $$87\mathrm{.}30$ each and pay coupons semi$-$annually on $30$th June, and $31$st December. The coupon payment due to be paid on $31$th December $2023$ has been paid.

$$ The preference shares pay $$0\mathrm{.}30$ annual dividends and are currently trading at $$4\mathrm{.}83$ each.

$$ The applicable company tax rate is $30\%.$

$$ The current yield on Australian Government $10-$year bonds is $4\mathrm{.}20\%$ per annum.

$$ The expected market return is $10\mathrm{.}25\%$ per annum.

$$ End$-$of$-$month share prices for VTL and the market $($S&P$/$ASX $200)$ over the previous

five years are provided in the file: BAFI$1012\_$S$1\_2024\_$Project$\_$Data.xlsx make a free cash flow chart