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Section A Answer the compulsory question from Section A. Question 1 Bluefish Plc is considering investing in a new mining project and the board has engaged you as a recent graduate to help them evaluate this investment If the board goes ahead with the proposed project below, they would have to pay annual licence payments of 400,000 to the government and production would not start until one year later because it will take a year to prepare the site and buy in equipment To begin production, Bluefish Pic would have to commission the manufacture of specialist engineering equipment costing 10m, half of which is payable immediately, with the remainder due in one year. Bluefish Plc has already conducted a survey of the site which showed a potential productive life of four years with its new machine. The survey cost E250,000 and is payable immediately The accounts department has produced the following projected profit and loss The overheads contain an annual charge of 200,000 which represents an apportionment of head office costs. This is an expense which would be incurred whether or not the project proceeds. The remainder of the overheads relates directly to the project. The new equipment will have a resale value at the end of the ninth year of E1,500,000 . During the whole of Year 3, a specialised item of machinery will be needed, which is currently being used by another division of Bluefish Plc. This division will therefore incur hire costs of E100,000 for the period the machinery is on loan . The project will require additional cash reserves of E2,000,000 to be held throughout the project for operational purposes. These are recoverable at the end of the project. The government will make a one-off refund of licence charges one and a half months after the end of the fifth year of 250,000 The company's cost of capital is 13 per cent. Ignore taxation, inflation and exchange rate movements and controls. Requiredi Calculate tile net present value of the proposed project (10 marks) b. Calculate the internal rate of return for the proposed project Hints Use 13% and 16% to compute the internal rate of return (7 marks) c. The board of directors have never been on a finance course and do not understand any of the finance jargon. However, they have asked you to persuade them that the appraisal method you have used in a. above can be relied on Prepare a presentation for the board of directors explaining the reasoning and justification for using your chosen project appraisal technique and your treatment of specific items in the accounts. You will need to explain concepts such as the time value of money, opportunity cost and sunk cost in plain English (8 marks) Total: 25 marks Projected profit and loss 2000 Years Sales 950000 10000.00 7000.00 Materials and consumables Wapes Overhead Depreciation Government cence payment 56000 700.00 100000 000 10000 720.00 750.00 10000 560.00 900.00 95000 100000 700.00 1800.00 200000 1400 2500.00 2500.00 2500.00 2.500.00 10000 400.00 400.00 The following additional information is available: Payments and receipts arise at the year-ends unless otherwise stated The customers of Bluefish Plc demand and receive a credit period of three months The suppliers of materials and consumables grant a credit period of three months Formulas Table A-1 Future Value Interest Factors for One Dollar Compounded atr Percent for a periods FIF(1 + r)" 1. The Standard deviation of a portfolio opwa??+ (1 - 0)*2 + 20 (1 - a cov(RAR) op - Portfolio andard deviation A Varance of investment Varance of it COV{RR) Covariance of And cov(RAR) - Coration coefficient 2. Cost of ordinary lwy share capital, having a current , having just paid a dividend, de, with the dividend growing in perpetuty by a constant per annum: ... 3. Capitaluring models of 4. We were cost of capital where and outy are the only sources of Table A-2 Future Value Interest Factors for a One Dollar Annuity Compounded dr Percent for Periods FIFA WACC kv. + ka VA V. + V 5. Economic order EQ - 2AC H End of Formus Tables follow overleaf Tables continue overleaf Table A-3 Present Value Interest Factors for One Dollar Discounted atr Percent for n Periods: PVIF = (1+r)" 1 1.35 HS NE e EN NOBLE TS SA SI TH . . UN . NE . . We 1 NE E IN e GI . . TO BEN BE . . e . 3. BIT . W BILLE HE IN Foto SED . . 11 1938 SIS RO 981 IN BRE LIN . ber .. PEL MAS TRI TER 12 LON 36 WW BE SIN . LUR 18 BRE I 14 13 844 24 THER BH I LE 61 Beu NI IN WS PRO re Flute w . EN UIT HD RE WANN IN We THEO LIDEO 16 ar LEO BO B 2.318 SI BH HD . LEO CH om 13 D. NO HO IRTS HT w TRO 14 ON BUS 11 GO 11 NI GE BIN . . OR SH . - . Table A-4 Present Value Interest Factors for a One-Dollar Annuity 1-(1+r) Discounted at r Percent for n Periods: PVIFA- SU 1 LEA HOCH HR NE LA 1 1413 HOLT 11 1 SH w WOCHE AN 49 4 4 11111 EN RE HT HT 44 LI La LE . LOL 600 & AN . . IN AL 4. 9.463 11 LON HE RE 11 Ss 610 E LL Se 9.4 NO - . SIN W HE HT LEATH HH LE LRT 1. RE 61 WE 11 N w PORE *** 81 E TER MUMS . 14TH ! SH WA Twit HT AME S WE 1 UN . 181 18 GAR NL ISH IH TE LE TI 11. 18 RH B. 41 11 T T! rete RE F LE NO 14 STI NE ELTE LLI EL SUPET PIT TE ILI MIN TETE 1 1 IL TETE Section A Answer the compulsory question from Section A. Question 1 Bluefish Plc is considering investing in a new mining project and the board has engaged you as a recent graduate to help them evaluate this investment If the board goes ahead with the proposed project below, they would have to pay annual licence payments of 400,000 to the government and production would not start until one year later because it will take a year to prepare the site and buy in equipment To begin production, Bluefish Pic would have to commission the manufacture of specialist engineering equipment costing 10m, half of which is payable immediately, with the remainder due in one year. Bluefish Plc has already conducted a survey of the site which showed a potential productive life of four years with its new machine. The survey cost E250,000 and is payable immediately The accounts department has produced the following projected profit and loss The overheads contain an annual charge of 200,000 which represents an apportionment of head office costs. This is an expense which would be incurred whether or not the project proceeds. The remainder of the overheads relates directly to the project. The new equipment will have a resale value at the end of the ninth year of E1,500,000 . During the whole of Year 3, a specialised item of machinery will be needed, which is currently being used by another division of Bluefish Plc. This division will therefore incur hire costs of E100,000 for the period the machinery is on loan . The project will require additional cash reserves of E2,000,000 to be held throughout the project for operational purposes. These are recoverable at the end of the project. The government will make a one-off refund of licence charges one and a half months after the end of the fifth year of 250,000 The company's cost of capital is 13 per cent. Ignore taxation, inflation and exchange rate movements and controls. Requiredi Calculate tile net present value of the proposed project (10 marks) b. Calculate the internal rate of return for the proposed project Hints Use 13% and 16% to compute the internal rate of return (7 marks) c. The board of directors have never been on a finance course and do not understand any of the finance jargon. However, they have asked you to persuade them that the appraisal method you have used in a. above can be relied on Prepare a presentation for the board of directors explaining the reasoning and justification for using your chosen project appraisal technique and your treatment of specific items in the accounts. You will need to explain concepts such as the time value of money, opportunity cost and sunk cost in plain English (8 marks) Total: 25 marks Projected profit and loss 2000 Years Sales 950000 10000.00 7000.00 Materials and consumables Wapes Overhead Depreciation Government cence payment 56000 700.00 100000 000 10000 720.00 750.00 10000 560.00 900.00 95000 100000 700.00 1800.00 200000 1400 2500.00 2500.00 2500.00 2.500.00 10000 400.00 400.00 The following additional information is available: Payments and receipts arise at the year-ends unless otherwise stated The customers of Bluefish Plc demand and receive a credit period of three months The suppliers of materials and consumables grant a credit period of three months Formulas Table A-1 Future Value Interest Factors for One Dollar Compounded atr Percent for a periods FIF(1 + r)" 1. The Standard deviation of a portfolio opwa??+ (1 - 0)*2 + 20 (1 - a cov(RAR) op - Portfolio andard deviation A Varance of investment Varance of it COV{RR) Covariance of And cov(RAR) - Coration coefficient 2. Cost of ordinary lwy share capital, having a current , having just paid a dividend, de, with the dividend growing in perpetuty by a constant per annum: ... 3. Capitaluring models of 4. We were cost of capital where and outy are the only sources of Table A-2 Future Value Interest Factors for a One Dollar Annuity Compounded dr Percent for Periods FIFA WACC kv. + ka VA V. + V 5. Economic order EQ - 2AC H End of Formus Tables follow overleaf Tables continue overleaf Table A-3 Present Value Interest Factors for One Dollar Discounted atr Percent for n Periods: PVIF = (1+r)" 1 1.35 HS NE e EN NOBLE TS SA SI TH . . UN . NE . . We 1 NE E IN e GI . . TO BEN BE . . e . 3. BIT . W BILLE HE IN Foto SED . . 11 1938 SIS RO 981 IN BRE LIN . ber .. PEL MAS TRI TER 12 LON 36 WW BE SIN . LUR 18 BRE I 14 13 844 24 THER BH I LE 61 Beu NI IN WS PRO re Flute w . EN UIT HD RE WANN IN We THEO LIDEO 16 ar LEO BO B 2.318 SI BH HD . LEO CH om 13 D. NO HO IRTS HT w TRO 14 ON BUS 11 GO 11 NI GE BIN . . OR SH . - . Table A-4 Present Value Interest Factors for a One-Dollar Annuity 1-(1+r) Discounted at r Percent for n Periods: PVIFA- SU 1 LEA HOCH HR NE LA 1 1413 HOLT 11 1 SH w WOCHE AN 49 4 4 11111 EN RE HT HT 44 LI La LE . LOL 600 & AN . . IN AL 4. 9.463 11 LON HE RE 11 Ss 610 E LL Se 9.4 NO - . SIN W HE HT LEATH HH LE LRT 1. RE 61 WE 11 N w PORE *** 81 E TER MUMS . 14TH ! SH WA Twit HT AME S WE 1 UN . 181 18 GAR NL ISH IH TE LE TI 11. 18 RH B. 41 11 T T! rete RE F LE NO 14 STI NE ELTE LLI EL SUPET PIT TE ILI MIN TETE 1 1 IL TETE