country
$20 Bonus + 25% OFF
Securing Higher Grades Costing Your Pocket? Book Your Assignment at The Lowest Price Now!

Capital Budgeting Decision Of Equator Ltd,

tag 0 Download8 Pages / 1,939 Words tag Add in library Click this icon and make it bookmark in your library to refer it later. GOT IT

Questions:

1.Calculate the NPV, Non-Discounted Payback, and the IRR of Plant A and Plant B.  Interpret your results. (If relevant, state any assumptions you have made.)

2.Describe and Analyse 4 keys risks associated with the Project you recommend (Project A or B).
                                                   
3.Briefly define an ‘Efficient’ Capital Market.  To what extent is Equator’s ability to borrow funds in the Capital Market dependent upon the Capital Market Operating in an Efficient Manner? 
 
 

Answers:

1.Equator Ltd, an Australian manufacturer of laptop computers, is considering expanding its Australian operation into producing tablet computers. For this expansion the CFO has two options. The first option, Plant A, is a highly automated process that involves significant capital outlays but has lower running costs. Plant B is a more labour intensive facility that has lower initial capital outlays but higher running costs. Plant A and Plant B are mutually exclusive projects. A capital budgeting analysis of both the options was carried out to decide which project the company must choose to manufacture the tablet computers.

The incremental cash flow for both the projects is presented below:

PLANT A

Year

0

1

2

3

4

5

6

Sales Units

 

155000

163525

172518.875

182007.4131

192017.8208

202578.801

Selling price

 

$320.0

$331.2

$342.8

$354.8

$367.2

$380.1

Revenue

 

$4,96,00,000.0

$5,41,59,480.0

$5,91,38,090.2

$6,45,74,359.1

$7,05,10,357.1

$7,69,92,021.7

Cash operating expenses:

 

 

 

 

 

 

 

Variable cost

 

$33,79,000.0

$35,64,845.0

$37,60,911.5

$39,67,761.6

$41,85,988.5

$44,16,217.9

Labour costs

 

$22,01,000.0

$23,22,055.0

$24,49,768.0

$25,84,505.3

$27,26,653.1

$28,76,619.0

Fixed costs

 

$6,00,000.0

$6,00,000.0

$6,00,000.0

$6,00,000.0

$6,00,000.0

$6,00,000.0

Sales and marketing exp.

 

$19,00,000.0

$19,66,500.0

$20,35,327.5

$21,06,564.0

$21,80,293.7

$22,56,604.0

Total cash operating expenses

 

$80,80,000.0

$84,53,400.0

$88,46,007.0

$92,58,830.8

$96,92,935.3

$1,01,49,440.8

Depreciation

 

$29,20,083.3

$29,20,083.3

$29,20,083.3

$29,20,083.3

$29,20,083.3

$29,20,083.3

Total operating expenses

 

$1,10,00,083.3

$1,13,73,483.3

$1,17,66,090.3

$1,21,78,914.2

$1,26,13,018.6

$1,30,69,524.1

Operating income before taxes

 

$3,85,99,916.7

$4,27,85,996.7

$4,73,71,999.9

$5,23,95,445.0

$5,78,97,338.5

$6,39,22,497.5

Tax @30%

 

$1,15,79,975.0

$1,28,35,799.0

$1,42,11,600.0

$1,57,18,633.5

$1,73,69,201.6

$1,91,76,749.3

Operating income after taxes

 

$2,70,19,941.7

$2,99,50,197.7

$3,31,60,399.9

$3,66,76,811.5

$4,05,28,137.0

$4,47,45,748.3

After tax operating cash flow

 

$2,99,40,025.0

$3,28,70,281.0

$3,60,80,483.2

$3,95,96,894.8

$4,34,48,220.3

$4,76,65,831.6

Terminal year after tax non operating cash flow

 

 

 

 

 

 

 

After tax salvage value

 

 

 

 

 

 

$86,29,500

Return of net working capital

 

 

 

 

 

 

$35,00,000

Initial investment

-$12,65,00,000

 

 

 

 

 

 

Total after tax cas flow

-$12,65,00,000

$2,99,40,025.0

$3,28,70,281.0

$3,60,80,483.2

$3,95,96,894.8

$4,34,48,220.3

$5,97,95,331.61

Discount at 13.35%

$1.0

$0.882

$0.778

$0.687

$0.606

$0.534

$0.471

Present value of cash flows

-$12,65,00,000.0

$2,64,13,784.7

$2,55,83,524.1

$2,47,74,663.9

$2,39,86,950.1

$2,32,20,115.2

$2,81,92,794.9


NPV = sum of present value of all cash flows

            = $25,671,833

IRR = 20% (using the excel formula)

Payback period

Year

Amount

Cumulative value

0

-$12,65,00,000.0

-$12,65,00,000.0

1

$2,99,40,025.0

-$9,65,59,975.0

2

$3,28,70,281.0

-$6,36,89,694.0

3

$3,60,80,483.2

-$2,76,09,210.8

4

$3,95,96,894.8

$1,19,87,684.1

5

$4,34,48,220.3

$5,54,35,904.4

6

$5,97,95,331.6

$11,52,31,236.0


Payback period = 3+(-$2,76,09,210.8 / $3,95,96,894.8)

                         = 3.7 years

Working Notes

1.

Initial Investment

Land

$1,16,50,000

Building

$8,20,00,000

Machinery

$2,61,50,000

Furnishing & fittings

$32,00,000

Increase in working capital

$35,00,000

 

$12,65,00,000

 2.

Terminal value

Salvage value

$86,29,500

Book value

$86,29,500

Profit on sale

$0

Terminal value

$86,29,500

 

Depreciation

Machinery

$2,61,50,000

Salvage value

33%

 

$86,29,500

Depreciable value

$1,75,20,500

Depreciation

$29,20,083.33

 The incremental cash flow for project B is presented below:

Year

0

1

2

3

4

5

Sales Units

 

95000

100225

105737.375

111552.9306

117688.3418

Selling price

 

$440.0

$455.4

$471.3

$487.8

$504.9

Revenue

 

$4,18,00,000.0

$4,56,42,465.0

$4,98,38,148.6

$5,44,19,520.4

$5,94,22,034.8

Cash operating expenses:

 

 

 

 

 

 

Variable cost

 

$34,01,000.0

$35,88,055.0

$37,85,398.0

$39,93,594.9

$42,13,242.6

Labour costs

 

$23,75,000.0

$25,05,625.0

$26,43,434.4

$27,88,823.3

$29,42,208.5

Fixed costs

 

$8,00,000.0

$8,00,000.0

$8,00,000.0

$8,00,000.0

$8,00,000.0

Sales and marketing exp.

 

$28,00,000.0

$28,98,000.0

$29,99,430.0

$31,04,410.1

$32,13,064.4

Total cash operating expenses

 

$93,76,000.0

$97,91,680.0

$1,02,28,262.4

$1,06,86,828.2

$1,11,68,515.6

Depreciation

 

$13,60,100.0

$13,60,100.0

$13,60,100.0

$13,60,100.0

$13,60,100.0

Total operating expenses

 

$1,07,36,100.0

$1,11,51,780.0

$1,15,88,362.4

$1,20,46,928.2

$1,25,28,615.6

Operating income before taxes

 

$3,10,63,900.0

$3,44,90,685.0

$3,82,49,786.2

$4,23,72,592.2

$4,68,93,419.2

Tax @30%

 

$93,19,170.0

$1,03,47,205.5

$1,14,74,935.9

$1,27,11,777.7

$1,40,68,025.8

Operating income after taxes

 

$2,17,44,730.0

$2,41,43,479.5

$2,67,74,850.3

$2,96,60,814.5

$3,28,25,393.5

After tax operating cash flow

 

$2,31,04,830.0

$2,55,03,579.5

$2,81,34,950.3

$3,10,20,914.5

$3,41,85,493.5

Terminal year after tax non operating cash flow

 

 

 

 

 

 

After tax salvage value

 

 

 

 

 

$33,49,500

Return of net working capital

 

 

 

 

 

$48,00,000

Initial investment

-$8,90,80,000

 

 

 

 

 

Total after tax cash flow

-$8,90,80,000

$2,31,04,830.0

$2,55,03,579.5

$2,81,34,950.3

$3,10,20,914.5

$4,23,34,993.5

Discount at 13.35%

$1.0

$0.882

$0.778

$0.687

$0.606

$0.534

Present value of cash flows

-$8,90,80,000.0

$2,03,83,617.1

$1,98,49,889.4

$1,93,18,863.7

$1,87,91,805.1

$2,26,25,171.2

NPV = $1, 18, 89,346.5

IRR = 18% (using the excel formula)

Payback period

Year

Amount

Cumulative value

0

-$8,90,80,000.0

-$8,90,80,000.0

1

$2,31,04,830.0

-$6,59,75,170.0

2

$2,55,03,579.5

-$4,04,71,590.5

3

$2,81,34,950.3

-$1,23,36,640.2

4

$3,10,20,914.5

$1,86,84,274.4

5

$4,23,34,993.5

$6,10,19,267.8

Payback period = 3+ (-$1,23,36,640.2 / $3,10,20,914.5)

                          = 3.4 years

Working Notes
1.

Initial Investment

Land

$1,16,50,000

Building

$5,95,00,000

Machinery

$1,01,50,000

Furnishing & fittings

$29,80,000

Increase in working capital

$48,00,000

 

$8,90,80,000

2.

Terminal value

Salvage value

$33,49,500

Book value

$33,49,500

Profit on sale

$0

Terminal value

$33,49,500

3.

Depreciation

Machinery

$1,01,50,000

Salvage value

33%

 

$33,49,500

Depreciable value

$68,00,500

Depreciation

$13,60,100.00

The result of the analysis is given below:

Particulars

Plant A

Plant B

NPV

$25,671,833

$11,889,346.5

Non-discounted payback

3.7 years

3.4 years

IRR

20%

18%

Plant A has a higher NPV and IRR while plant B has a better payback period. However, we will consider Plant A and decide on choosing Plant A for manufacturing the tablet computers because for mutually exclusive projects, the project with a higher NPV should be preferred over all other capital budgeting techniques. This is NPV is considered the best technique as it takes into account the time value of money unlike IRR and non discounted payback period. Also NPV considers all the future cash flows of the project unlike payback period. NPV is the excess of cash inflows over the cash outflows. Hence, higher the NPV, higher is the profitability of the project. Therefore the company should set up Plant A which is highly automated as it has a higher NPV.

There were certain assumptions which were made while doing the analysis. The discount rate considered for discounting the future cash flows is the WACC used by the Computer Tablet industry. This is because the discount factor should be such that it incorporates the risk of the project, and since this project is related to the Computer Tablet industry, hence, it is better to take WACC of industry instead of the WACC of the company. The working capital is assumed to be recovered at the end of life of the project. The head office expenses have not been considered in the analysis because it is not an incremental expense and does not arise as a result of the project.

2.Capital budgeting is based on the estimation of the various inflows and outflows related to the project. The management of the company expects the project to deliver the required benefits in order to be profitable. The various types of risks that may be associated with the Project A (recommended) are discussed below:

  1. a) Stand alone risk – this risk pertains only to the project in question and does not affect the other assets of the company. The risk is associated with the estimation of the future inflows outflows and is quantified by the amount of deviation of the actual inflows and outflows to the estimated one (Burja1, Burja2, 2009)
  2. b) Company risk – the project is part of the company and hence it also poses risk for the company as a whole as to how the earnings of the company will be affected as a result of undertaking the project. Also the risk of the project may be diversified by the company’s other assets.
  3. c) Market risk – this risk is associated with the market conditions of the economy. The future estimations are based on the overall economic growth and the inflation rate, as given in this case also, so there is a risk that the economic conditions may change and as such all the estimations may go wrong resulting in negative effects for the project. Market risk also includes the change in demand of the tablet computers. The estimations are based on the current market scenario, however if the demand changes, risk of project failure increases.
  4. d) Industry specific risk – this involves the legal and technological risk of the industry. Under legal risk, there might be a change in the government policies for the industry which may affect the company’s earnings. Also a technological advancement may render the tablet computers outdated which would decrease its market demand.

3.Efficient capital market is a market where the prices of a security reflect the new information accurately and that too in real time. A market is said to be efficient if the share prices can fully incorporate and induct the information which includes the basic value of the share. The value of the share is the present value of all the future cash flows associated with the share. The cash flows are in the form of dividends and the selling price of the share in the end. Such efficient markets are said to exist in the real world due to the capital markets being more and more organized and with the transaction costs being very low and information being easily available to all participants, the markets are said to be efficient. The efficient market hypothesis assumes that no analyst or trader can profits from trading as the trading will push the prices of the shares to its real value and thus the shares will be accurately priced. Three forms of efficiency in capital markets are said to exist which are weak form efficiency in which assumes that all the past activities and information of the stock is incorporated into its price and hence technical analysis is useless in this market form. Under semi strong form, the stock prices are assumed to reflect all publicly available information accurately. However, there exists scope for making abnormal gains by accessing private information available to the insiders of the company. Under strong form, the share prices reflect all information whether public or private and neither technical nor fundamental analysis is useful in this market form. The importance of efficiency of capital markets lies in two ways. First, if the investors can make excess profits by applying trading strategies and second if the stock price reflects all information accurately, the new capital goes to the investment which has it highest valued use (Jones, Netter, NA)

 


Capital markets are used to raise funds by government for infrastructure projects and by private firms for growth and expansion (Marwa, 2016). The primary role of a capital market is allocation of the ownership of the capital stock of the economy. Therefore a capital market allows the firms to make investment decisions and the investors can choose from the various stocks available in the market which represent the firms activities. Also the investors assume that the prices of the stock fully reflect the available information (Fama, 2010). The shareholders of a company want the company’s management to maximize the stock prices and thus will ensure the company invest in high valued investments which will increase the shareholder return. Thus if the stock market is efficient, the company can emphasize on investing in long term projects as the funds are easily available and also the prices of new share at which the investors are willing to invest are determine by the market and reflects the value of the future cash flows of the project. Moreover, a company whose stocks have appreciated finds it easier to raise funds in a capital market because higher share prices means a small ownership of the company needs to be given to raise capital. Favourable economic conditions also make it easier to raise funds. Since the tablets computer industry is a hot industry, thus it will be easier for Equator Ltd. to raise funds in the capital market and that too at the correct prices.

 

References:

Burja1, C., Burja2, V., (2009), The Risk Analysis for Investments Projects Decision, Annales Universitatis Apulens Series Oeconomica, Vol.11, No.1

Fama, E.F., (2010), Efficient Capital Markets: A review of Theory and Empirical Work, The Journal of Finance, Vol.25, N0.2

Marwa, M., (2016), Market Data Review: The Role of Capital Markets in Financing Development, accessed online on 13th Feb, 2016, available at https://www.thecitizen.co.tz/News/Business/The-role-of-capital-markets-in-financing-development/1840414-3445302-vd9vvi/index.html

Jones, S.L, Netter, J.M., (NA), Efficient Capital Markets, accessed online on 13th February, 2017, available at, https://www.econlib.org/library/Enc/EfficientCapitalMarkets.html                       

Download Sample

Get 100% money back after download, simply upload your unique content* of similar no. of pages or more. We verify your content and once successfully verified 100% value credited to your wallet within 7 days.

Upload Unique Document

Document Under Evaluation

Get Credits into Your Wallet

*The content must not be available online or in our existing Database to qualify as unique.

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2018). Capital Budgeting Decision Of Equator Ltd,. Retrieved from https://myassignmenthelp.com/free-samples/capital-budgeting-decision-of-equator-ltd.

"Capital Budgeting Decision Of Equator Ltd,." My Assignment Help, 2018, https://myassignmenthelp.com/free-samples/capital-budgeting-decision-of-equator-ltd.

My Assignment Help (2018) Capital Budgeting Decision Of Equator Ltd, [Online]. Available from: https://myassignmenthelp.com/free-samples/capital-budgeting-decision-of-equator-ltd
[Accessed 16 July 2020].

My Assignment Help. 'Capital Budgeting Decision Of Equator Ltd,' (My Assignment Help, 2018) <https://myassignmenthelp.com/free-samples/capital-budgeting-decision-of-equator-ltd> accessed 16 July 2020.

My Assignment Help. Capital Budgeting Decision Of Equator Ltd, [Internet]. My Assignment Help. 2018 [cited 16 July 2020]. Available from: https://myassignmenthelp.com/free-samples/capital-budgeting-decision-of-equator-ltd.


End your doubt 'should I pay someone to do my dissertation by availing dissertation writing services from MyAssignmenthelp.com. We are the leading dissertation help company in Australia that holds the record of providing high-quality dissertation papers at an affordable rate. Students, who search 'need help with my dissertation', should hire our professional dissertation experts for successful completion of the task.

Latest Accounting Samples

ACC566 Accounting Systems And Processes

Download : 0 | Pages : 9

Answer: Introduction: Plagiarism may be defined as the wrongful act of taking the works, ideas and opinions of others and passing them as their own. In other to plagiarize means to steal the work of other and pass the works as their own. Collusion refers to a form of plagiarism where the assignment is done by two or more persons in order to do a piece of work which is to done by individual person. It is also considered to be application of u...

Read More arrow

ACCT20074 Contemporary Accounting Theory

Download : 0 | Pages : 12

Answer: Introduction The primary focus of the assessment is to formulate a detailed study regarding concepts of measurement and the relevance of the same in the process of accounting. The accountants consider measurement of financial information to be an integral part of the accounting system. The assessment would be looking into the IASB framework for the purpose of reporting and measuring financial aspects of the business (Reports. 202...

Read More arrow Tags: Australia 5 Contemporary accounting theory Central Queensland University 

MA501 Foundation Of Accounting

Download : 0 | Page : 1

Answer:

Accounting Practice Set [now finished]



You have now finished the practice set. Your result is recorded in our database.
Click Home to be returned to your home page.

 

Read More arrow Tags: Australia 5 MA501 Melbourne Institute of Technology 

ACG315 Accounting And Finance For Fluctuating Revenues And Company Size

Download : 0 | Pages : 3
  • Course Code: ACG315
  • University: University Of Bedfordshire
  • Country: United Kingdom

Answer: Task One The change of taxation rules and regulation of conventional and statute laws have always confused willing, compliant firms. Different stakeholders take part in helping the companies adapt to the new changes. The actualization of this checks and balances lower down to the firm accountant. He, therefore, deals with the confusion at a more significant level.  We, therefore, discuss the confusing issues and the role of the a...

Read More arrow Tags: Australia Homebush Management Java - Car Parking Management System University of New South Wales Humanities 

SBLC4003 Business Accounting

Download : 0 | Pages : 11
  • Course Code: SBLC4003
  • University: University Of Wales Trinity Saint David
  • Country: United Kingdom

Answer: Introduction: Every entity has to prepare the financial statements, on a regular basis, to communicate the financial results of the business operated by it. These financial statements contain the summarised information expressed in financial terms about all the transactions and events that are entered into during the course of business. All the financial information that helps the readers to assess the financial health of business of ...

Read More arrow
Next
watch

Save Time & improve Grade

Just share Requriment and get customize Solution.

question
We will use e-mail only for:

arrow Communication regarding your orders

arrow To send you invoices, and other billing info

arrow To provide you with information of offers and other benefits

1,362,932

Orders

4.9/5

Overall Rating

5,082

Experts

Our Amazing Features

delivery

On Time Delivery

Our writers make sure that all orders are submitted, prior to the deadline.

work

Plagiarism Free Work

Using reliable plagiarism detection software, Turnitin.com.We only provide customized 100 percent original papers.

time

24 X 7 Live Help

Feel free to contact our assignment writing services any time via phone, email or live chat.

subject

Services For All Subjects

Our writers can provide you professional writing assistance on any subject at any level.

price

Best Price Guarantee

Our best price guarantee ensures that the features we offer cannot be matched by any of the competitors.

Our Experts

Assignment writing guide
student rating student rating student rating student rating student rating 4/5

248 Order Completed

100% Response Time

Lloyd Bernabe

MSc in Accounting

London, United Kingdom

Hire Me
Assignment writing guide
student rating student rating student rating student rating student rating 4/5

2594 Order Completed

95% Response Time

Michael Johnson

Masters of MSc in Economics

Washington, United States

Hire Me
Assignment writing guide
student rating student rating student rating student rating student rating 5/5

154 Order Completed

97% Response Time

Harold Alderete

PhD in Economics

London, United Kingdom

Hire Me
Assignment writing guide
student rating student rating student rating student rating student rating 5/5

93 Order Completed

100% Response Time

Jackson Mitchell

MiM (Masters in Management) in Supply Chain Management

New Jersey, United States

Hire Me

FREE Tools

plagiarism

Plagiarism Checker

Get all your documents checked for plagiarism or duplicacy with us.

essay

Essay Typer

Get different kinds of essays typed in minutes with clicks.

edit

GPA Calculator

Calculate your semester grades and cumulative GPa with our GPA Calculator.

referencing

Chemical Equation Balancer

Balance any chemical equation in minutes just by entering the formula.

calculator

Word Counter & Page Calculator

Calculate the number of words and number of pages of all your academic documents.

Refer Just 5 Friends to Earn More than $2000

Check your estimated earning as per your ability

1

1

1

Your Approx Earning

Live Review

Our Mission Client Satisfaction

hello I am very satisfied with the work you did for me. I will not hesitate to take your services again for future assignments, proudly recommend... please review your price for returning customers

flag

User Id: 457107 - 15 Jul 2020

Australia

student rating student rating student rating student rating student rating

Thanks to this expert in following closely on the assignment structure. Appreciated it :)

flag

User Id: 415901 - 15 Jul 2020

Australia

student rating student rating student rating student rating student rating

Great work! I am very pleased with my outcome. It was was easy to understand, yet consistent with the business quantitative method lingo in answering the questions.

flag

User Id: 383727 - 15 Jul 2020

Australia

student rating student rating student rating student rating student rating

thank you for the good work progress, really like how it\'s done and on time submitted to me

flag

User Id: 225590 - 15 Jul 2020

Australia

student rating student rating student rating student rating student rating
callback request mobile
Have any Query?