Part A (40 marks) The Board of Directors has met to consider the recent market developments and are obviously concerned at the prospect of losing the retail sale outlet of the S/D pod compatible machines. They believe there are two options which they need to consider: - Or Purchasing Homewyre Electricals Greater City Factory to continue the production of the coffee machines. Shinepodd could convert an old unused warehouse they own and internally investing in the necessary infra structure to manufacture the machines. One of Liela Dorcas finance team has pulled together the following information, in respect of both these options. Purchasing Homewyre Electricals Greater City Factory The initial purchase price discussed for the factory is M$35m. It is assumed: . That no further investment will be required and that manufacture of the coffee machines will continue, uninterrupted, post-sale. That the current levels of Homewyre sales and expenditure will continue, with no disruption. That 90% of the existing, experienced work force will remain with the business after the purchase' That the Homewyre IT systems will be compatible with Shinepodd's own systems. The following cashflow projections have been produced based on these assumptions: Year 0 (2023) M$ '000 (35,000) Year 1 M$ '000 12,000 Year 2 M$ '000 15,000 Year 3 M$ '000 Year 4 M$ '000 18,000 20,000 Internal Investment to manufacture the machines The initial investment is believed to be M$25m. It is assumed: That the first year of the investment will not be generate positive cashflows due to the necessary conversion work required to convert the old warehouse. That the existing manufacturers will withdraw from the market and cease making the coffee machines. That all subsequent years will generate good levels of positive cashflows, due to the limited availability of alternative providers of compatible coffee machines. That they will be able to hire experienced staff following the assumed closure of the Homewyre Electricals Greater City Factory which will help move them quickly into a positive cashflow position. The following cashflow projections have been produced based on these assumptions: Year 0 (2023) M$ '000 Year 1 M$ '000 Year 2 (8,000) M$ '000 10,000 Year 3 M$ '000 17,000 (25,000) Year 4 M$ '000 21,000 Liela Dorcas has advised the Directors that the most appropriate discount factors for both investments are:- Year 1 Year 2 Year 3 Year 4 NPV DCF @ 11% 0.901 0.812 0.731 0.659 IRR DCF @ 19% 0.840 0.706 0.593 0.499 Required: a) Calculate the Net Present Value, Internal Rate of Return and Payback period for both potential investments. (13 marks) b) Explain which investment you would recommend the directors of Shinepodd Ltd proceed with. (2 marks) c) Critically evaluate the assumptions the above provided cashflow projections have been based on and what effect any errors in these may have on the outcome of your decision in (b) above. (5 marks) d) Based on your decision in (b) above provide a memo to Shinepodd's Chief Finance Director of the most appropriate form(s) of long-term finance to be used to fund your recommended investment i.e., Share Capital, Bank Loan and/or retained profit. Your memo should include the following: - 1. Calculations for the gearing ratio and interest cover for year ended 31 December 2021 and 31 December 2022. (4 marks) 2. An evaluation of the long-term finance options available to Shinepodd, concluding with a final recommendation to the Board of Directors of which source(s) of long-term finance they should choose. (12 marks) 3. An overview of how this recommendation will potentially impact the 2023 (Year 0) financial statements of Shinepodd. Student guidance on the marking of part c) 2 above - (12 marks) A mark of 12 only to be awarded where the students demonstrate: - (4 marks) Excellent knowledge of the advantages and disadvantages of each of the long-term finance options, which is used to develop and sustain very well-reasoned and presented argument regarding the final recommendation to the board of directors. A mark of 10 to be awarded where the students demonstrate: - Demonstrates good knowledge of the advantages and disadvantages of each of the long-term finance options, which is used to develop and sustain an argument regarding the final recommendation to the board of directors. A mark of 7 to be awarded where the students demonstrate: - Demonstrates adequate knowledge of the advantages and disadvantages of each of the long- term finance options, which is used to develop and sustain an argument regarding the final recommendation to the board of directors. A mark of 4 to be awarded where the students demonstrate: - Demonstrates weak knowledge of the advantages and disadvantages of each of the long-term finance options, with little argument developed or sustain regarding the final recommendation to the board of directors. A mark of 3 or less to be awarded where the students demonstrate: - Demonstrates little to no knowledge of the advantages and disadvantages of each of the long- term finance options, with little to no argument developed or sustain regarding the final recommendation to the board of directors.