1 ACC511- Managerial Finance Project Evaluation Report (Task 2) Semester 1, 2019 Imagine that you have recently joined the finance division at Dell Inc. Prepare a professional report that answers the following two questions. Guidelines regarding the format of the report can be found at the end of this file. Please adhere to the guidelines provided. Q1) Dell is considering setting-up a new laptop manufacturing plant. The plant requires an initial investment of $500 million. The equipment will depreciate at the rate of 10% per annum on diminishing value basis. Dell estimates that it will be able to produce and sell 500,000 laptops during the first year of operation and every year the number of units sold will increase by 2%. The plant will continue to operate for 10 years, at the end of which it can be sold for $150 million. The plant will be built on land that the company owns with an after-tax current market value of $250 million. It is expected that, at the end of 10 years, the land will be worth $350 million (aftertax). Dell expects to sell each laptop at a price of $700 with the variable cost of production at $140 per laptop. Operating the plant requires an investment in inventory of $100 million, which will be recovered at the end of 10 years. The company will incur a fixed cost of $25 million every year the plant continues operating. The required return is 16%. Dell's marginal tax rate is 45%. 2 a) What are the yearly depreciation expenses? That is, make a table which shows the depreciation expenses every year. b) What are the yearly cash flows associated with the plant from year 1 to year 9? That is, make a table in which every step in the calculation of cash-flows is shown. c) What are the cash-flows in year-0? d) What are the terminal or year-10 cash flows? e) Calculate the NPV of the project? Interpret the result. f) Calculate the IRR and payback period? Provide an interpretation. g) Suppose you talk to Dell's CFO and he says, "We apply the same discount rate to all projects in a category. We do not adjust for project specific risks." Does this approach make sense in view of what you have learned in this course? Q2) Suppose you have analysed the project explained in Q1 and have submitted your report to the Chief Financial Officer (CFO) at Dell. When you arrived at work on Friday morning, you found the following memo on your desk addressed to you: "From: Jason Katz, Chief Financial Officer RE: Project Evaluation As you are aware, we are in the process of imposing a greater financial discipline. From now on, only those projects will be funded that generate sufficient cash-flows to pay the financing cost every year. The project that you have analysed will be funded entirely through a bank loan which will be paid-off in 10 equal annual instalments. Your project must be able to generate sufficient cash-flows to pay these annual instalments, otherwise, it will not be funded. To understand this requirement better, I am providing everyone with the following example: Suppose a project with a 3 life of 3 years generates cash-flows of 200 million, 150 million, and 80 million in years 1, 2, and 3 respectively. The project is financed through a loan that requires a repayment of 100 million every year for the next 3 years. This project will not be funded because it generates only 80 million in year 3, which is not sufficient to meet the instalment of 100 million that year. I would like you to take another look at your proposed project and get back to me by Monday morning with the answer to the following question: Assuming that your project is funded entirely through a bank loan that must be paid-off in 10 equal annual instalments, what is the maximum interest rate on the loan which lets us meet our financial discipline requirement? I would also like you to provide me with your feedback regarding this new requirement" Do the following: a) Answer the question raised in the memo. b) Provide your feedback on the new requirement (what are its pros and cons?) based on the knowledge of finance gained in this course. Guidelines for the Project Evaluation Report Your report should be structured as follows: 1. Title Page 2. Executive Summary 3. Introduction 4. Answers to Q1, and Q2 5. Conclusions and Recommendations 4 6. References 8. Appendix A: Excel Spreadsheet with detailed calculations If you choose to do the calculations in excel, then the spreadsheet much be attached in appendix A, with key numbers and tables cut-and-pasted from excel into the main document for ease of reading. Please prepare a professional looking report where a reader does not have to jump back and forth between the main body and the appendix. 9. Appendix B: Statement of Contribution (must be signed by all group members) Complete the Table provided on the next page and cut and paste it at the end of your report in appendix B. The Table requires you to rate your contribution on a scale of 1 to 5 (where 1 represents very low, 3 medium and 5 very high contribution). Each group member must sign this statement. Comments are optional. You should strive to contribute equally towards this task. Note: You can either work individually on this assessment or work in a group of up to 3 people. The statement of contribution is not required if you work individually. Grading of the Report You would be graded based on the marking rubric for Task 2. The marking rubric is available in Task 2 Assessment Folder. 5 Appendix B: ACC511 Task 2 - Contribution to Group Work Note: Use a scale of 1 to 5 for rating the contribution of each group member (1 represents very low, 3 represents medium and 5 represents very high contribution). Contribution Introduction Answers to questions Conclusion and recommendations Overall contribution Signatures Comments (if any) Name of the group member Name of the group member Name of the group member
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