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Unformatted text preview: Capital Budgeting Exercise Topic 1: Capital Budgeting Versailles Ênergie S.A. (VE) is a large French power company that is looking to expand its operations into Australia. The president of VE, Mr Louis de Bourbon, has hired your firm Capital Markets Australia Pty Ltd (CMA) to undertake a due diligence of the three most viable investment options available and make a recommendation about which (if any) of the options should be undertaken by VE. CMA will be paid a consultancy fee of $850,000 for the evaluation work it caries out. To assist in this process VE finance department has supplied the following information on each of the projects for you to use in the evaluation. All costs are stated in Australian dollars. Option 1: Nuclear Power Plant at Lake Munmorah in NSW The first option involves construction of a 1300 MW nuclear power plant on the shores of Lake Munmorah on the central coast of NSW. The plant is forecast to have an operational life of 10 years before technological advances will render it obsolete. The costs and revenues associated with this plant are as follows: Initial Outlays (2007): • Purchase of land (non-depreciable) - $4,595,000 • Construction costs (depreciable) - $164,899,000 Whilst all of the construction costs will be incurred up-front (ie 2007) then actual construction of the plant will take 5 years and so it will not come online (and start generating revenue) until 2012. Annual operating figures: • Nominal electricity sales revenue (first year of operation) – $96,529,000 • Nominal labour costs (first year of operation) - $6,751,000 • Nominal uranium costs (first year of operation) - $21,850,000 • Nominal overhead costs (first year of operation) - $2,640,000 Working Capital: • VE has determined that the plant will require an initial investment of $5,655,600 in working capital in 2007 • Thereafter the balance in working capital will need to be either 10% of the amount of the following years sales revenue or the initial balance (whichever is higher) • At the end of the life of the project the remaining balance in working capital will be fully recovered • The ATO has ruled that working capital outlays are not deductible for tax purposes Additional Information: • Revenue, labour and overhead costs are expected to rise by the CPI rate which is forecast to be 3.5% pa over the life of the project • Demand for uranium is forecast to be very strong with prices expected to rise by 9% pa over the life of the project • VE is liable to pay income and capital gains taxes at the corporate tax rate of 30%...
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- Three '10
- Corporate Finance, overhead costs, VE