Calculate the following using the data from Yahoo Finance for the company you selected for Question 1 of Assignment
 Calculate the daily market return over the last five years from the daily prices, calculate the monthly returns from the daily returns, and calculate the yearly returns from the monthly returns.
 Calculate the total risk (i.e. yearly standard deviation of the daily returns).
 Calculate the yearly systematic / market risk using the daily returns of the stock and daily return of the market index.
 Calculate the unsystematic risk / firm specific risk. Suggest whether this company is a good investment. Answer the following questions while making your suggestion.
a) What is the basis for selection of this stock if you suggest this as a good investment?
b) Would you invest all your money into this stock? If not, why not? How will you address this concern?
ABC Ltd. would like to set up a new expansion plant. Currently, ABC has an option to buy an existing building at a cost of AUD 24 000. Necessary equipment for the plant will cost AUD 16 000, including installation costs. The economic life of the equipment and building are 5 and 40 years, respectively. The project also requires an initial investment of AUD 12 000 in net working capital. The initial working capital investment will be made at the time of the purchase of the building and equipment.
The project’s estimated economic life is four years. At the end of that time, the building is expected to have a market value of AUD 15 000 and a book value of AUD 21 600, whereas the equipment is expected to have a market value of AUD 4 000 and a book value of AUD 3 200.
Annual sales will be AUD 80 000. The production department has estimated that variable manufacturing costs will total 60% of sales and that fixed overhead costs, excluding depreciation, will be AUD 10 000 a year. Depreciation expense will be determined for the year using straight line depreciation method.
ABC’s tax rate is 40%; its cost of capital is 12%; and, for capital budgeting purposes, the company’s policy is to assume that operating cash flows occur at the end of each year. The plant will begin operations immediately after the investment is made, and the first operating cash flows will occur exactly one year later.
 Compute the initial investment outlay, operating cash flow over the project’s life, and the terminalyear cash flows for ABC’s expansion project.
 Determine whether the project should be accepted using NPV analysis.
 Do the sensitivity analysis using different levels of change (e.g. 2%, 5% and 10% increase and decrease) of each of the key inputs (e.g., sales, variable costs and cost of capital)
 Identify the most sensitive factor
 Perform the scenario analysis
Monthly return of OEL
In this question, Origin Energy Limited Company (OEL) is selected for the investment purpose. OEL is traded on an Australia Stock Exchange (AX).
OEL’s historical daily data of last 5 years that is April, 01 2012 to March, 31 2017 was taken from https://au.finance.yahoo.com/.
Now, detailed analysis of return and risk of OEL and market (AX) is calculated below:
Calculation of Daily return, monthly return and yearly return of OEL and market (ASX) from April, 01 2012 to March, 31 2017 (Source: https://au.finance.yahoo.com/, 2017).
 Refer MSExcel sheet for the daily returns of OEL and market from April, 01 2012 to March, 31 2017.
 Monthly Returns of OEL and market from April,01 2012 to March, 31 2017 is below:
Months/Years 
20122013 
20132014 
20142015 
20152016 
20162017 
April 
0.35% 
7.29% 
4.23% 
12.20% 
9.01% 
May 
2.70% 
9.11% 
1.36% 
4.74% 
4.76% 
June 
5.27% 
6.74% 
3.00% 
9.99% 
1.71 % 
July 
2.94% 
4.73% 
1.94% 
5.07% 
4.11% 
August 
4.53% 
12.78% 
10.11% 
26.15% 
3.95% 
September 
4.87% 
6.45% 
3.53% 
28.85% 
3.92% 
October 
0.39% 
3.90% 
4.62% 
4.65% 
0.96% 
November 
2.97% 
4.59% 
14.75% 
2.76% 
10.93% 
December 
5.76% 
1.03% 
4.28% 
16.60% 
11.01% 
January 
8.10% 
0.50% 
8.47% 
11.55% 
7.49% 
February 
0.66% 
5.37% 
16.30% 
11.78% 
7.48% 
March 
8.87% 
0.95% 
7.43% 
14.76% 
7.49% 
(Source: https://au.finance.yahoo.com/, 2017).
Monthly return of Market (AX)
Months/Years 
20122013 
20132014 
20142015 
20152016 
20162017 
April 
1.57% 
4.50% 
1.77% 
1.67% 
3.35% 
May 
7.43% 
5.18% 
0.09% 
0.14% 
2.44% 
June 
0.54% 
2.43% 
1.74% 
5.55% 
2.60% 
July 
4.25% 
5.17% 
4.33% 
4.43% 
6.14% 
August 
1.13% 
1.69% 
0.09% 
8.79% 
2.32% 
September 
1.66% 
1.66% 
6.05% 
3.33% 
0.12% 
October 
2.95% 
3.92% 
4.39% 
4.34% 
2.16% 
November 
0.19% 
1.93% 
3.90% 
1.28% 
2.40% 
December 
3.14% 
0.66% 
1.95% 
2.60% 
4.10% 
January 
4.85% 
3.03% 
3.29% 
5.52% 
0.75% 
February 
4.59% 
4.10% 
5.98% 
2.32% 
1.63% 
March 
2.65% 
0.14% 
0.56% 
4.14% 
2.69% 
(Source: https://au.finance.yahoo.com/, 2017).
 Yearly Returns of OEL and market from April,01 2012 to March, 31 2017 is below:
Years 
Yearly return of OEL 
Yearly return of Market index 




 Below is the calculation of yearly Total Risk (σ) of OEL and market index (AX):
Years 
σ of OEL 
σ of Market index 
 Below is the calculation of yearly Systematic Risk of OEL:
Years 
Systematic Risk of OEL 



 Below is the calculation of yearly UnSystematic Risk of OEL:
Years 
UnSystematic Risk of OEL 
Before answering OEL is good or not for investment decisions, following terms required to be understood:
As everyone knows that both risk and return is the characteristics of the investment.
 Return:Returns of the company form the basis for the investment decisions to the investor. If the returns are highly fluctuating, then it is called as high risk investments. Thus, considering the returns of the OEL for 20152016 and 20162017, shows drastically growth from 47.32% to 39.81%. Hence, on the basis of returns this is considered as good investments (Banz, 1981).
 Risk (σ):Risk is correlated with the returns of the company. It is calculated to find out the deviations in the returns which are the best measure of analysing risks. It is a sum of Systematic risk and Unsystematic risk (Kaplan and Garrick, 1981).
 Systematic Risks: It is based on external factors and this risk is not controlled by the company because it is related with the market. Investor needs to consider this risk for its investment decisions.
It is calculated by using stock returns and the market index returns. In this case, considering the past trends of OEL, it is seen that Systematic risk showing the slightly upward trend which indicates that OEL is a good for the investment (Klemkosky and Martin, 1975 ; Lakonishok, and Shapiro,1986).
 UnSystematic Risks: It is based on internal company’s factor and which company has a control over this risk. This risk can be eliminated but it is not important for the investor to consider this risk for investment decisions (Tang and Shum, 2003).
Therefore, on the basis of above understanding it can be said that OEL is a good for the investment.
Criteria: Return of 20162017, showing a positive return as compared to 20152016 which was negative and also it is observed that systematic risk of 20162017 is slightly showing upward trend from 20152016. On the basis of these two criteria, an investor should select this stock for investment.
No, investor should not invest all of his money into this stock; instead he should invest in diversified securities so that its return and risk is minimum.
 Cost of the building = AUD 24,000
 Life of the building = 40 years
 Cost of the equipment (incl. installation costs) = AUD 16,000
 Life of the equipment = 5 years
 Investment in net working capital = AUD 12,000
 Project’s Life = 4 years
 Annual Sale = AUD 80,000
 Variable manufacturing cost is 60% of total sales = 60% of AUD 80,000 = AUD 48,000
 Fixed overhead cost (excl. depreciation) = AUD 10,000
 Taxation rate = 40%
 Depreciation is calculated with Straight line method
 Cost of capital (discount rate) = 12%
 Building Equipment
 Market Value AUD 15,000 AUD 4,000
 Book Value AUD 21,600 AUD 3,200
a 
Initial Investment outlay: 

Particulars 
Amount in AUD 

Cost of the building 
24,000 

Cost of the Equipment 
16,000 

Net Working Capital 
12,000 

Initial Investment outlay 
52,000 

b 
Operating cash flows of four years: 

Particulars 
Amount in AUD 

Sales 
80,000 

Less: Variable Costs 
48,000 

Contribution 
32,000 

Less: Fixed Costs excluding depreciation 
10,000 

Less: Depreciation (W.N.i.) 
3800 

Profit before tax (PBT) 
18,200 

Less: Tax @ 40% 
7280 

Profit after tax (PAT) 
10,920 

Add: Depreciation 
3800 

Cash flow after tax (CFAT) 
14,720 

PVF (12%, 4) (W.N. ii.) 
3.037 

Present value of Cash Inflows 
44710 

c 
Terminal Inflows at the end of 4th year: 

Particulars 
Amount in AUD 

Net working Capital 
12,000 

PVF of 12% of 4th year 
0.636 

PV of terminal cash inflows 
7626 

Working Notes: 

Calculation of total Depreciation: 

Depreciation of Building and Equipment: 

Depreciation = (Cost  Scrap Value)/ No. of years 

Particulars 
Building 

(Amount in AUD) 

Cost 
24,000 

Scrap Value 
0 

No. of years 
40 

Depreciation 
600 

Calculation of Present value factor of 12% of 4 years: 

Year 
PVF @ 12% 

1 
0.893 

2 
0.797 

3 
0.712 

4 
0.636 

Total 
3.037 
 NPV:
Calculation of NPV: 

Particulars 
Amount in AUD 
PV of Cash Inflows 
44710 
Add: PV of Terminal cash inflows 
7626 
Total PV of cash inflows 
52336 
Less: Initial investment outlay 
52,000 
NPV 
336 
Since NPV is positive, ABC Ltd. should accept the project of new expansion plant.
3.Sensitivity Analysis: It is used for the measurement of the risk. This is calculated by changing one variable at one time and keeping all the other variables constant (Saltelli, Chan and Scott, 2000).
In this question, sensitivity analysis is measured using 10% level of change in both ways with respect to sales, variable cost and cost of capital.
 Sensitivity analysis of sales:
 Let us assume Sales be increased by 10% i.e. AUD 80,000 + 10% = AUD 88,000.
Operating cash flows of four years: 

Particulars 
Amount in AUD 

Sales 
88,000 

Less: Variable Costs 
52,800 

Contribution 
35,200 

Less: Fixed Costs excluding depreciation 
10,000 

Less: Depreciation (W.N. i.) 
3800 

Profit before tax (PBT) 
21,400 

Less: Tax @ 40% 
8560 

Profit after tax (PAT) 
12,840 

Add: Depreciation 
3800 

Cash flow after tax (CFAT) 
16,640 

PVF (12%, 4) (W.N. ii.) 
3.037 

Present value of Cash Inflows 
50541 

Terminal Inflows at the end of 4th year: 

Particulars 
Amount in AUD 

Net working Capital 
12,000 

PVF of 12% of 4th year 
0.636 

PV of terminal cash inflows 
7626 

Calculation of NPV: 

Particulars 
Amount in AUD 

PV of Cash Inflows 
50541 

Add: PV of Terminal cash inflows 
7626 

Total PV of cash inflows 
58168 

Less: Initial investment outlay 
52,000 

NPV 
6,168 

Thus, NPV is increased by (%) = 
1736% 
 Let us assume Sales be decreased by 10% i.e. AUD 80,000  10% = AUD 72,000.
Operating cash flows of four years: 

Particulars 
Amount in AUD 

Sales 
72,000 

Less: Variable Costs 
43,200 

Contribution 
28,800 

Less: Fixed Costs excluding depreciation 
10,000 

Less: Depreciation (W.N.i.) 
3800 

Profit before tax (PBT) 
15,000 

Less: Tax @ 40% 
6000 

Profit after tax (PAT) 
9,000 

Add: Depreciation 
3800 

Cash flow after tax (CFAT) 
12,800 

PVF (12%, 4) (W.N.ii.) 
3.037 

Present value of Cash Inflows 
38878 

Terminal Inflows at the end of 4th year: 

Particulars 
Amount in AUD 

Net working Capital 
12,000 

PVF of 12% of 4th year 
0.636 

PV of terminal cash inflows 
7626 

Calculation of NPV: 

Particulars 
Amount in AUD 

PV of Cash Inflows 
38878 

Add: PV of Terminal cash inflows 
7626 

Total PV of cash inflows 
46504 

Less: Initial investment outlay 
52,000 

NPV 
5,496 

Thus, NPV is decreased by (%) = 
1736% 
 Sensitivity analysis of Variable costs:
 Let us assume variable costs be increased by 10% i.e. AUD 48,000 + 10% = AUD 52,800.
Operating cash flows of four years: 

Particulars 
Amount in AUD 

Sales 
80,000 

Less: Variable Costs 
52,800 

Contribution 
27,200 

Less: Fixed Costs excluding depreciation 
10,000 

Less: Depreciation (W.N.i.) 
3800 

Profit before tax (PBT) 
13,400 

Less: Tax @ 40% 
5360 

Profit after tax (PAT) 
8,040 

Add: Depreciation 
3800 

Cash flow after tax (CFAT) 
11,840 

PVF (12%, 4) (W.N.ii.) 
3.037 

Present value of Cash Inflows 
35962 

Terminal Inflows at the end of 4th year: 

Particulars 
Amount in AUD 

Net working Capital 
12,000 

PVF of 12% of 4th year 
0.636 

PV of terminal cash inflows 
7626 

Calculation of NPV: 

Particulars 
Amount in AUD 

PV of Cash Inflows 
35962 

Add: PV of Terminal cash inflows 
7626 

Total PV of cash inflows 
43588 

Less: Initial investment outlay 
52,000 

NPV 
8,412 

Thus, NPV is decreased by (%) = 
2603% 
 Let us assume variable costs be decreased by 10% i.e. AUD 48,000  10% = AUD 43,200.
Now the revised NPV is calculated as follows:
Operating cash flows of four years: 

Particulars 
Amount in AUD 

Sales 
80,000 

Less: Variable Costs 
43,200 

Contribution 
36,800 

Less: Fixed Costs excluding depreciation 
10,000 

Less: Depreciation (W.N.i.) 
3800 

Profit before tax (PBT) 
23,000 

Less: Tax @ 40% 
9200 

Profit after tax (PAT) 
13,800 

Add: Depreciation 
3800 

Cash flow after tax (CFAT) 
17,600 

PVF (12%, 4) (W.N.ii.) 
3.037 

Present value of Cash Inflows 
53457 

Terminal Inflows at the end of 4th year: 

Particulars 
Amount in AUD 

Net working Capital 
12,000 

PVF of 12% of 4th year 
0.636 

PV of terminal cash inflows 
7626 

Calculation of NPV: 

Particulars 
Amount in AUD 

PV of Cash Inflows 
53457 

Add: PV of Terminal cash inflows 
7626 

Total PV of cash inflows 
61084 

Less: Initial investment outlay 
52,000 

NPV 
9,084 

Thus, NPV is increased by (%) = 
2603% 
 Sensitivity analysis of Cost of capital:
 Let us assume cost of capital be increased by 10% i.e. 12% + 10% = 13.2%
Operating cash flows of four years: 

Particulars 
Amount in AUD 

Sales 
80,000 

Less: Variable Costs 
48,000 

Contribution 
32,000 

Less: Fixed Costs excluding depreciation 
10,000 

Less: Depreciation (W.N.i.) 
3800 

Profit before tax (PBT) 
18,200 

Less: Tax @ 40% 
7280 

Profit after tax (PAT) 
10,920 

Add: Depreciation 
3800 

Cash flow after tax (CFAT) 
14,720 

PVF (13.2%, 4) (W.N.iii.) 
2.962 

Present value of Cash Inflows 
43603 

Terminal Inflows at the end of 4th year: 

Particulars 
Amount in AUD 

Net working Capital 
12,000 

PVF of 13.2% of 4th year 
0.609 

PV of terminal cash inflows 
7308 

Calculation of NPV: 

Particulars 
Amount in AUD 

PV of Cash Inflows 
43603 

Add: PV of Terminal cash inflows 
7308 

Total PV of cash inflows 
50911 

Less: Initial investment outlay 
52,000 

NPV 
1,089 

Thus, NPV is decreased by (%) = 
424% 
 Let us assume cost of capital be decreased by 10% i.e. 12%  10% = 10.8%
Now the revised NPV is calculated as follows:
Operating cash flows of four years: 

Particulars 
Amount in AUD 

Sales 
80,000 

Less: Variable Costs 
48,000 

Contribution 
32,000 

Less: Fixed Costs excluding depreciation 
10,000 

Less: Depreciation (W.N.i.) 
3800 

Profit before tax (PBT) 
18,200 

Less: Tax @ 40% 
7280 

Profit after tax (PAT) 
10,920 

Add: Depreciation 
3800 

Cash flow after tax (CFAT) 
14,720 

PVF (10.8%, 4) (W.N.iv.) 
3.116 

Present value of Cash Inflows 
45864 

Terminal Inflows at the end of 4th year: 

Particulars 
Amount in AUD 

Net working Capital 
12,000 

PVF of 10.8% of 4th year 
0.664 

PV of terminal cash inflows 
7962 

Calculation of NPV: 

Particulars 
Amount in AUD 

PV of Cash Inflows 
45864 

Add: PV of Terminal cash inflows 
7962 

Total PV of cash inflows 
53826 

Less: Initial investment outlay 
52,000 

NPV 
1,826 

Thus, NPV is increased by (%) = 
443% 
 Calculation of Present value factor of 13.2% of 4 years:
Year 
PVF @ 13.2% 
1 
0.883 
2 
0.780 
3 
0.689 
4 
0.609 
Total 
2.962 
 Calculation of Present value factor of 10.8% of 4 years:
Year 
PVF @ 10.8% 
1 
0.903 
2 
0.815 
3 
0.735 
4 
0.664 
Total 
3.116 
 Scenario Analysis: It is the extension of the sensitivity analysis because it considers changing of 2 variables at one time so that combined effect is obtained. It moves from Best case to the worst case of the outcome (The Economic times, 2017). It has 4 components:
 In 1^{st}component, factor is determined which ranges from market to competitor’s response.
 2^{nd}component determines number of outcomes for each factor which can be best, average and worst.
 3^{rd}component focuses on critical factors for each outcome.
 Last in 4^{th}component, probabilities are assigned to each factor.
References
Banz, R.W.,1981, The relationship between return and market value of the common stocks, Journal of financial economics, Vol.9, no.1, pp.318.
Kaplan, S. and Garrick, B.J., 1981, On the quantitative definition of risk, Risk analysis. Vol.1, no.1, pp. 1127.
Klemkosky, R.C. and Martin, J.D.,1975, The adjustment of beta forecasts, the journal of finance, vol.30, no.4, pp.11231128.
Lakonishok, J. and Shapiro, A.C., 1986, Systematic risk, total risk and size as determinants of stock market returns, Journal of banking & finance, vol.10, no.1, pp,105132.
Origin Energy Limited (ORG. AX), 2017, Historical Data, viewed on 3 April 2017, from <https://au.finance.yahoo.com/quote/ORG.AX/history?period1=1333218600&period2=1490898600&interval=1d&filter=history&frequency=1d>.
S&P/ASX 200(^AXJO), 2017, Historical Data, viewed on 3 April 2017, from <https://au.finance.yahoo.com/quote/%5EAXJO/history?period1=1333218600&period2=1490898600&interval=1d&filter=history&frequency=1d>.
Saltelli, A., Chan, K. and Scott, E.M., 2000, Sensitivity analysis, New York: Wiley.
Shapiro, A.C., 2005, Capital budgeting and investment analysis,Prentice hall.
Tang, G.Y. and Shum, W.C., 2003, The relationships between unsystematic risk, skewness and stock returns during up and down markets, international business review, vol.12, no.5, pp. 523541.
The Economic times, 2017, definition of ‘scenario analysis’.
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