need this resolved ASAP and with the most accurate and detailed explanations to help me understand

You must answer ALL the questions. (Total 100 marks) In January 2016, Ravi, the chief financial officer of Modern Textiles Company, located in Coimbatore India, was questioning whether the company should install a new ringspinning machine. The primary advantage of the new ring spinner is its ability to produce a finer-quality yarn that would be used for higher-quality and higher-margin products. The finer quality yarn would be sold in a niche market that would command a 10% increase in the selling price of yarn which was currently $1.0235 a pound. In addition, the new machine would provide increased efficiency as well as greater reliability. The efficiency of the new machine would also reduce operating costs with lower power consumption and maintenance expenses. Sales volume, however, would be 5% lower than the current market and the cost of customer returns would be higher, which made the decision a difficult one when combined with the $8.25 million installation cost. The decision to invest in new technology was complicated because of the poor performance of Modern Textiles as well as the difficult circumstances facing the Textile Industry. Modern Textiles was, however, competing in select markets that were likely to survive foreign competition at a lower margin over the long run. Modern Textiles was a yarn manufacturer established in 1980. The finished products were cotton and synthetic/cotton blend yarns that were sold to a variety of apparel and industrial goods manufacturers. It served four major customer segments: hosiery, knitted outerwear, wovens, and industrial and specialty products. The revenue break-up of Modern Textiles for various segments are: Hosiery Knitted outerwear Wovens Industrial and Specialty 43% 35% 13% 9% Exhibits 1 and 2 show Modern Textiles' financial statements for 2012, 2013, 2014, and 2015. The steady decline in sales had led the management to close four manufacturing facilities in 2014 in an effort to match the capacity to the shrinking textile market and reduce manufacturing costs. The textile market has been changing over time. While India had the advantage of major cotton producing and exporting country, competition from China, Vietnam and Indonesia has reduced the competitive advantage of Indian textile industry. Consumer preferences and fads also shaped the market. The emphasis in the industry had shifted from mass production to flexible manufacturing as textile mills aimed to supply customised markets. This change enabled apparel producers to bring goods to retailers and consumers in a short time frame. In general, consumer preferences had moved towards finer quality yarn with minimum defects. Information technology also had downside risk for yarn producers as the apparel manufacturer can easily identify the yarn producer whose yarn was defective and this FIN303 Copyright 2016 SIM University Examination - January Semester 2016 Page 2 of 8 caused the returns from manufacturers of apparel to increase. This is important because Modern Textiles needs to produce high quality yarn with low amount of defects. Like many of its competitors, Modern Textiles had been struggling financially. The company had not responded quickly to the deteriorating business environment and had suffered consecutive losses for the past 3 years. Currently, the company had limited cash available and had trouble maintaining sufficient working capital. Since 2014, the company had succeeded in cutting its selling, general and administrative (SG&A) expenses by $3.9 million. These efforts had allowed the company to continue operations but the difficult financial environment was expected to continue to present a challenge for Modern Textiles. New Machinery The new machinery will be in operation for 4 years. It will cost $8.05 million to purchase the machinery and there would be an installation cost of $200,000 for a total capitalised cost of $8.25 million. The machinery will be depreciated on a straight line basis over 4 years to zero book value. However, it can be sold for $100,000 in the open market at the end of 4 years. Modern Textiles had already spent $15,000 on marketing research to gauge customer interest in it yarn as well as $5,000 on engineering tests concerning the suitability of ventilation, materials flow and inventory systems in its plant. The cost structure of a textile plant was primarily composed of materials cost and conversion cost which includes the cost of labour, dyes, chemicals, power, maintenance, consumer returns for defects and various other production and overhead costs. In 2015, the conversion cost was $0.43/lb. Most of the conversion costs will not be affected when new machine is installed. There will be no change in the work force but the current operators would need to be trained on the new machine at a one-time cost of $50,000 during the installation year. Exhibit 3 shows the details of demand for yarn as well as the costs associated with the new machine. The target capital structure for Modern Textiles is 50% debt and 50% equity. The risk free rate is 2.8%. The market risk premium is 6%. The beta of Modern Textiles is 1.2. The cost of debt for Modern Textiles is 5%. Tax rate is 20%. FIN303 Copyright 2016 SIM University Examination - January Semester 2016 Page 3 of 8 Exhibit 1 Balance Sheet for the years ending 31 December. (Figures in $000) 2012 2013 2014 2015 1,144 17,322 34,778 2,774 56,018 5,508 11,663 33,155 1,922 52,248 2,192 20,390 31,313 713 54,608 1,973 26,068 33,278 2,378 63,697 2,654 32,729 230,759 266,142 -147,891 118,251 4,696 122,947 2,594 31,859 220,615 255,068 -147,104 107,964 4,678 112,642 2,516 30,308 197,889 230,713 -146,302 84,411 4,004 88,415 2,505 30,427 190,410 223,342 -154,658 68,684 3,610 72,294 Total Assets 178,965 164,890 143,023 135,991 Liabilities Accounts Payable Accruals Current portion of long-term debt Total current Liabilities Long-term debt Other Long-term Liabilities Total Long-term Liabilities Total Liabilities Shareholder equity 12,236 10,061 1,009 23,306 66,991 16,566 83,557 106,863 7,693 8,716 1,730 18,139 66,991 14,081 81,072 99,211 9,667 9,017 0 18,684 58,000 11,776 69,776 88,460 10,835 9,316 0 20,151 58,000 10,297 68,297 88,448 Common Stock, par $0.01 Capital Surplus Retained earnings Total Shareholder Equity Total Liabilities and Shareholder Equity 50 15,868 56,184 72,102 178,965 50 15,678 49,951 65,679 164,890 50 15,668 38,845 54,563 143,023 50 15,668 31,825 47,543 135,991 Assets Cash and Cash equivalents Accounts Receivables, net Inventory Other Current Assets Total Current Assets Property and equipment Land Buildings Machinery and Equipment Gross PPE Less Accumulated Depreciation Net PPE Other non-current assets Total non-current assets FIN303 Copyright 2016 SIM University Examination - January Semester 2016 Page 4 of 8 Exhibit 2 Income Statements for the years ending December 31 (Figures in $000) Pounds shipped (000s) Average selling price/lb conversion cost/lb Average raw material cost/lb Net sales Raw Material cost Cost of conversion Gross profit SG&A expenses Depreciation and Amortisation Operating profit Interest Expense Other income (expense) Asset Impairments Earnings before tax tax at 20% Net profit Net profit before impairment cost 2012 187,673 1.3103 0.4447 0.7077 2013 2014 2015 190,473 151,893 144,116 1.2064 1.2045 1.0235 0.4421 0.4465 0.4296 0.6429 0.6487 0.4509 245,908 132,812 83,455 29,641 14,603 15,241 -203 6,777 229,787 182,955 147,503 122,461 98,536 64,982 84,212 67,822 61,912 23,114 16,597 20,609 14,218 11,635 10,305 13,005 11,196 9,859 -4,109 -6,234 445 6,773 5,130 3,440 1,143 -1,232 -409 -4,758 -7,564 -9,739 -17,354 -10,968 -1,948 -3,471 -2,194 -7,791 -13,883 -8,774 -6,980 -1,396 -5,584 -5,584 -7,791 -9,125 -1,210 Exhibit 3 Demand and costs associated with new machinery Sales volume (in pounds) selling price per pound Cost of cotton per pound Conversion cost/lb SG&A expenses Inventory days Cost of Machinery 2016 26,000,000 1.126 0.45 0.41 7% 20 8,250,000 Inventory days reflect the amount of yarn produced and valued as 20 days of sales. It is assumed that the number of days in a year is 365. FIN303 Copyright 2016 SIM University Examination - January Semester 2016 Page 5 of 8 Question 1 Compute the following ratios in 2015: ROE (before impairment) Gross profit margin Net profit margin (before impairment) Current ratio Quick Ratio Days sales outstanding Inventory turnover Fixed Asset turnover Total asset turnover Long term debt to (longterm debt + equity) Equity Multiplier (TA/E) 2012 -0.077 0.121 2013 -0.119 0.101 2014 -0.167 0.091 -0.023 2.404 0.911 25.359 3.819 2.000 1.374 -0.034 2.880 1.053 18.272 3.694 2.040 1.394 -0.050 2.923 1.247 40.121 3.147 2.069 1.279 0.482 2.482 0.505 2.511 0.515 2.621 2015 (10 marks) Question 2 Analyse the changes in the return on equity using other ratios. (15 marks) Question 3 Ravi of Modern Textiles is not sure what discount rate should be used for capital budgeting purposes. Modern Textiles is running short of cash for this investment and it is likely that Modern Textiles will have to borrow the amount of $8.25 million for undertaking this project. Thus he feels that the appropriate discount rate should be the cost of debt. However, his colleagues are of the opinion that financing option is not relevant in capital budgeting decision and hence should use the weighted average cost of capital. Analyse what rate should be used for discounting the cash flows. (10 marks) Question 4 Calculate the weighted average cost of capital for the company. (15 marks) FIN303 Copyright 2016 SIM University Examination - January Semester 2016 Page 6 of 8 Question 5 Modern Textiles had already spent $15,000 on marketing research to gauge customer interest in it yarn as well as $5,000 on engineering tests concerning the suitability of ventilation, materials flow and inventory systems in its plant. Discuss how this amount spent on marketing research and engineering tests be treated in capital budgeting analysis. (5 marks) Question 6 There will be no change in the work force but the current operators would need to be trained on the new machine at a one-time cost of $50,000 during the installation year. Discuss how this expense should be treated in capital budgeting analysis. (5 marks) Question 7 Calculate the net present value and analyse the investment decision. Complete the following table and discuss whether the project should be accepted or not. Sales volume (in pounds) selling price per pound Cost of cotton per pound Conversion cost/lb SG&A expenses Inventory days Cost of Machinery (in thousands) sales volume Sales in $ Cost of cotton Conversion cost SG&A expenses Depreciation Training costs Market research cost Engineering cost Operating income Tax (20%) After tax income Add Depreciation FIN303 Copyright 2016 SIM University Examination - January Semester 2016 2015 26,000,000 1.126 0.45 0.41 7% 20 8,250,000 2016 26,000 2017 26,000 2018 26,000 2019 26,000 Page 7 of 8 After tax cash flows Working capital Additional working capital Initial investment Investment in Machinery Terminal cash flows Sale of machinery tax on sale of machinery After tax proceeds of sale Net Cash flows Cost of capital PVIF PV of Cash flows NPV (40 marks) ----- END OF PAPER ----- FIN303 Copyright 2016 SIM University Examination - January Semester 2016 Page 8 of 8