PART 3: Relevant Calculations (Beta, Cost of Debt, Cost of Equity, WACC)

Relevant Info part 3: (still applicable)

Please show supporting working in an excel spreadsheet.

Question:

What are the closest Net Present Value (NPV) and Internal Rate of Return (IRR) of the project for Machine 1?

What are the closest Net Present Value (NPV) and Internal Rate of Return (IRR) of the project for Machine 2?

You still work for Tartan Knitwear (from Assignment Part 3 Case Study). As you did such a good job of estimating the company's Weighted Average Cost of Capital (WACC) the General Manager has asked to evaluate the two potential machines and recommend which to purchase. Details of the investment opportunities: Data Anticipate sales volume (units) in year 1 Selling Price (expected to remain constant) Y1 Expected revenue Expected annual sales growth rate Fixed costs of production (excl depreciation) p.a. Variable costs of production p.a. (% of Revenue) Projected increase in NWC (Yo only) Machine purchase cost Machine installation costs Expected useful life of machine Depreciation method Expected residual value Machine 1 100,000 $100 $10,000,000 10% $3,500,000 40% $500,000 $10,000,000 $500,000 5 years Straight line Machine 2 100,000 $100 $10,000,000 10% $4,000,000 30% $600,000 $12,000,000 $600,000 5 years Straight line $0 $0 All cash flows should be assumed to occur at the end of each financial year. All other data supplied in Part 3 of the assignment is still applicable. The WACC calculated in Part 3 should be rounded to 9% for use in this part of the assignment. You must lay out your spreadsheet as it appears on pages 315 to 321 of the textbook. To complete this assignment you MUST: answer the questions (which appear as multi-choice questions) on Canvas in the Assignment - Part Four section AND; upload your spreadsheet on Canvas in the Assignment - Part Four section. Marks for correctly answered questions will not be awarded unless a supporting spreadsheet has been uploaded. If you upload your spreadsheet but do not answer the questions correctly, no marks will be awarded. 1. Determine Tartan Knitwear's: Beta 1.30 (exactly) Costs of Debt kBond 4.30% or kgond (effective) (1 + 0.043) 1 = 4.346% (both accepted) Vbond $30m x $106.445 = $31,933,500 (market value must be used) WBond 31,933,500/110,433,500 = 28.92% kBank 5.75% Vloan $5,000,000 (in absence of any other information can assume to be market value) W loan 5,000,000/110,433,500 = 4.53% Cost of Equity kequity 2.5% + 1.3*(9.0%-2.5%) = 10.95% Vequity $14.70 x $5m = $73,500,000 WEquity 73,500,000/110,433,500 = 66.56% Weighted Average Cost of Capital (WACC). [28.9%*4.30%*(1-28%)]+[4.5%*5.75%*(1-28%)]+[66.5%*10.95%] or rate A/T rate w w *r Bond 4.30% 3.10% 28.92% 0.8954% Loan 5.75% 4.14% 4.53% 0.1875% Equity 10.95% 10.95% 66.56% 7.2883% WACC 100.0% 8.3712% 1,500,000 500,000 Appendix 1 - Balance Sheet (before machinery acquisition) Tartan Knitwear Limited Balance Sheet @ 31/07/19 Current Assets Current Liabilities Cash 500,000 Accounts Payables Accounts Receivables 500,000 Tax Due Inventory 1,000,000 Non-Current Liabilities Bonds (@ face value) Bank Loan Non-Current Assets PPE 90,000,000 Owners' Equity Issued Share Capital Retained Earnings 30,000,000 5,000,000 25,000,000 30,000,000 Total Assets 92,000,000 Total L + OE 92,000,000 Appendix 2 - Market Summary Data Company Tax Rate (t) Expected Market Return (rm) Risk Free Rate (rp) Bank Commercial Lending Rate (rp) 28% 9.0% 2.5% 5.75% Appendix 3 - Market History Data Year @31/8 NZX50 Index (Adjusted Close) Tartan Share Price (Adjusted Close) 8921 14.71 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 7694 7348 5921 5168 4538 3545 3396 3034 3016 11.35 8.67 6.51 5.01 7.24 5.99 2.55 1.18 1.76 2.58 5.77 4.38 3.66 3.43 3.01 3336 4213 3581 3360 2788 2212 Appendix 4 - Tartan Knitwear Ltd Listing Summary Instrument Tartan Knitwear Limited Ord Shares Name TNK $14.700 + $0.210 / 1.32% 32 Week Change: + 34.519/38.42% issued By Tartan Knitwear Limited ISIN Type NZ TNKLO00153 Ordinary Shares Activity Trading Status Trades Value Volume Capitalisation 1000 Trading 351 $1.996,936 135,846 $174,301 Performance Open High Low High Bid Low Offer $13.990 $14.760 $14.620 $14.70 $14.75 Fundamental PVE 22 370 EPS 30.657 NTA $1.510 Gross Div Yield 2.380% Securities Issued 5,000,000 Last dated: 29/8/2018 2:56 TNK Price History Load Interactive Charts 15.00 1100 10. Jul 18. Aug 20. Aug 27. Aug Appendix 5 - Tartan Knitwear Ltd Bond Issue Instrument Name TNK 15/12/2022 5.65% Tartan Bonds Issued By Tarta Knitwe Limited TNK 4.30% -0.05% / -1.15% 52 Week Change: 0.00% / 0.00% ISIN NZTNKLOO01 LA Vanilla Corporate Bonds $106.445 Type Price Per $100 Maturity Date Previous Payment Date 15 Dec 2022 15 Jun 2019 Performance Activity Trading status Trading Trades Value $21.289.00 Volume 20,000 Outstanding (000) $30,000 Open High Low High Bid Low Offer 4.39% 4.300 4304 4.39 4.304 Fundamental Face Value $1.000 Coupon 5.650% Next Record Date 5 Dec 2019 Frequency Serniamualy Minimum Holding 5,000 L e 29//2018. 1.02 TNK Price History Load Interactive Charts 30.Jul 12. Aug 20. Aug You still work for Tartan Knitwear (from Assignment Part 3 Case Study). As you did such a good job of estimating the company's Weighted Average Cost of Capital (WACC) the General Manager has asked to evaluate the two potential machines and recommend which to purchase. Details of the investment opportunities: Data Anticipate sales volume (units) in year 1 Selling Price (expected to remain constant) Y1 Expected revenue Expected annual sales growth rate Fixed costs of production (excl depreciation) p.a. Variable costs of production p.a. (% of Revenue) Projected increase in NWC (Yo only) Machine purchase cost Machine installation costs Expected useful life of machine Depreciation method Expected residual value Machine 1 100,000 $100 $10,000,000 10% $3,500,000 40% $500,000 $10,000,000 $500,000 5 years Straight line Machine 2 100,000 $100 $10,000,000 10% $4,000,000 30% $600,000 $12,000,000 $600,000 5 years Straight line $0 $0 All cash flows should be assumed to occur at the end of each financial year. All other data supplied in Part 3 of the assignment is still applicable. The WACC calculated in Part 3 should be rounded to 9% for use in this part of the assignment. You must lay out your spreadsheet as it appears on pages 315 to 321 of the textbook. To complete this assignment you MUST: answer the questions (which appear as multi-choice questions) on Canvas in the Assignment - Part Four section AND; upload your spreadsheet on Canvas in the Assignment - Part Four section. Marks for correctly answered questions will not be awarded unless a supporting spreadsheet has been uploaded. If you upload your spreadsheet but do not answer the questions correctly, no marks will be awarded. 1. Determine Tartan Knitwear's: Beta 1.30 (exactly) Costs of Debt kBond 4.30% or kgond (effective) (1 + 0.043) 1 = 4.346% (both accepted) Vbond $30m x $106.445 = $31,933,500 (market value must be used) WBond 31,933,500/110,433,500 = 28.92% kBank 5.75% Vloan $5,000,000 (in absence of any other information can assume to be market value) W loan 5,000,000/110,433,500 = 4.53% Cost of Equity kequity 2.5% + 1.3*(9.0%-2.5%) = 10.95% Vequity $14.70 x $5m = $73,500,000 WEquity 73,500,000/110,433,500 = 66.56% Weighted Average Cost of Capital (WACC). [28.9%*4.30%*(1-28%)]+[4.5%*5.75%*(1-28%)]+[66.5%*10.95%] or rate A/T rate w w *r Bond 4.30% 3.10% 28.92% 0.8954% Loan 5.75% 4.14% 4.53% 0.1875% Equity 10.95% 10.95% 66.56% 7.2883% WACC 100.0% 8.3712% 1,500,000 500,000 Appendix 1 - Balance Sheet (before machinery acquisition) Tartan Knitwear Limited Balance Sheet @ 31/07/19 Current Assets Current Liabilities Cash 500,000 Accounts Payables Accounts Receivables 500,000 Tax Due Inventory 1,000,000 Non-Current Liabilities Bonds (@ face value) Bank Loan Non-Current Assets PPE 90,000,000 Owners' Equity Issued Share Capital Retained Earnings 30,000,000 5,000,000 25,000,000 30,000,000 Total Assets 92,000,000 Total L + OE 92,000,000 Appendix 2 - Market Summary Data Company Tax Rate (t) Expected Market Return (rm) Risk Free Rate (rp) Bank Commercial Lending Rate (rp) 28% 9.0% 2.5% 5.75% Appendix 3 - Market History Data Year @31/8 NZX50 Index (Adjusted Close) Tartan Share Price (Adjusted Close) 8921 14.71 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 7694 7348 5921 5168 4538 3545 3396 3034 3016 11.35 8.67 6.51 5.01 7.24 5.99 2.55 1.18 1.76 2.58 5.77 4.38 3.66 3.43 3.01 3336 4213 3581 3360 2788 2212 Appendix 4 - Tartan Knitwear Ltd Listing Summary Instrument Tartan Knitwear Limited Ord Shares Name TNK $14.700 + $0.210 / 1.32% 32 Week Change: + 34.519/38.42% issued By Tartan Knitwear Limited ISIN Type NZ TNKLO00153 Ordinary Shares Activity Trading Status Trades Value Volume Capitalisation 1000 Trading 351 $1.996,936 135,846 $174,301 Performance Open High Low High Bid Low Offer $13.990 $14.760 $14.620 $14.70 $14.75 Fundamental PVE 22 370 EPS 30.657 NTA $1.510 Gross Div Yield 2.380% Securities Issued 5,000,000 Last dated: 29/8/2018 2:56 TNK Price History Load Interactive Charts 15.00 1100 10. Jul 18. Aug 20. Aug 27. Aug Appendix 5 - Tartan Knitwear Ltd Bond Issue Instrument Name TNK 15/12/2022 5.65% Tartan Bonds Issued By Tarta Knitwe Limited TNK 4.30% -0.05% / -1.15% 52 Week Change: 0.00% / 0.00% ISIN NZTNKLOO01 LA Vanilla Corporate Bonds $106.445 Type Price Per $100 Maturity Date Previous Payment Date 15 Dec 2022 15 Jun 2019 Performance Activity Trading status Trading Trades Value $21.289.00 Volume 20,000 Outstanding (000) $30,000 Open High Low High Bid Low Offer 4.39% 4.300 4304 4.39 4.304 Fundamental Face Value $1.000 Coupon 5.650% Next Record Date 5 Dec 2019 Frequency Serniamualy Minimum Holding 5,000 L e 29//2018. 1.02 TNK Price History Load Interactive Charts 30.Jul 12. Aug 20. Aug