AYR Co. is considering two separate projects known as ‘Aspire’ and ‘Wolf’ which are quite different but each of which has the potential to increase AYR Co.’s market share.
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This assignment contributes to 50% of the total module marks. The assessments are bonded which means you need 40%+ over both assessments combined to pass the module. Learning Outcomes to be assessed As specified in the validated module descriptor available at: https://icis.southwales.ac.uk/studentmodules/10122/studentmodulespecifications
Learning outcome 1 The ability of students to critically assess, apply and evaluate the issues and techniques of strategic financial management. 

Grading Criteria
Please see School’s marking criteria for undergraduate/post graduate assessments on the module VLE. Any additional grading/marking guidance will be posted with assessment task below. 

Assignment
AYR Co. is considering two separate projects known as ‘Aspire’ and ‘Wolf’ which are quite different but each of which has the potential to increase AYR Co.’s market share. To date $120,000 has been spent on market research into the increase in demand that can be expected for each project. The next stage is to conduct a financial appraisal to determine which project should be taken forward as AYR Co. can only afford to fund one project at this time. Project Aspire: This project will require the acquisition of plant and machinery costing $2,250,000 which is payable immediately. This machinery will have a scrap value of $375,000 at the end of the 5 years. There is also $140,000 working capital to be used immediately. This amount has been taken from the company’s retained profits and will be repaid at the end of the project. Cash inflows are expected to be $650,000 in year 1 rising at a rate of 7.5% per annum for years 2 to 5 inclusive. Variable costs in year 1 are expected to be $27,000 per annum and are expected to rise at 6.75% per annum. Capital allowances are available on the plant and machinery as follows:
This project will expand the current product range and will appeal to existing and potential customers. 
Project Wolf:
This project will require an immediate outlay of $2,250,000. This expenditure will not attract capital allowances. Annual cash inflows of $955,000 are expected to be constant for the life of the project. Material costs are expected to be $14,400 in the first year, rising at an annual inflation rate of 7.5% per annum. Other expenses are expected to be $18,000 in year 1 and these are expected to fall by 7.5% per annum over the life of the project. To undertake Project Wolf, factory space which is currently generating rental income will need to be used for the project. The rental income, which would not have been expected to change over the fiveyear period, is $75,000 per annum. This project will take the company in a new direction appealing to a different type of customer. Additional financial information: • Corporation tax is paid at a rate of 20% and tax is payable one year in arrears. • The weighted average cost of capital is 10% and, unless otherwise stated, cash flows occur at the end of the year to which they relate. • A straight line method of depreciation at a rate of 20% is applied to all noncurrent assets.
The initial investment of $2.250m, for whichever project is chosen, is significant in terms of value for AYR Co. The board of directors is considering ways to finance the investment, and will choose between, increasing equity by issuing new ordinary shares, or taking on new debt in the form of a bank loan at a fixed rate of interest. AYR Co. is currently financed as follows:
Required: Prepare a report to the Directors of AYR Co. which includes the following. 1. A calculation of the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period for projects Aspire and Wolf. Detailed calculations should be included as an appendix to the report. All cash flows should be rounded to 
the nearest $. 30%
2. Analysis and evaluation of the investment project options as follows: i. A recommendation regarding which project (if any) to undertake; ii. Justifications for your recommendation including an evaluation of the investment appraisal techniques used in task 1 above. iii. A summary of other factors that should be considered and information that may be needed prior to making a final decision. 30% 3. A discussion of the two sources of finance being considered by the board of AYR Co. Your report should include:
i. A description of Equity and Debt. ii. An explanation of the costs of each source of finance. iii. An analysis of the effect the selection of the source of finance may have on AYR Co.’s weighted average cost of capital. iv. An assessment of the impact of the selection of finance on current and potential shareholders and lenders. 30% Marks are available for presentation of the report, which must not exceed 3,000 words. 10% Total 100% Marking guidance 


Assessment guidance
Your report should be word processed, clearly laid out and concise and should be supported by appropriate workings for the numerical elements. The word limit for the report is 3,000 words.
The text of this assignment must be in your own words (not even a sentence or phrase should be taken from another source unless this source is referenced and the phrase placed in quotes). It is dishonest not to acknowledge the work of other people and you open yourself up to the accusation of plagiarism. Referencing should in accordance with the Harvard System. A guide published by the Library lists the most common types of references with examples. The guide can be found on the module VLE
Handin requirements and dates:
Please see the VLE
PLEASE NOTE THAT IF YOU ARE EVEN ONE MINUTE LATE UPLOADING YOUR FILE THIS WILL COUNT AS A LATE SUBMISSION AND THE APPROPRIATE PENALTY WILL APPLY
Solution in Brief
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Introduction
This task is about the investment decision of AYR Co especially as it regards financing two separate projects; project Aspire and Project Wolf which cost the same thing but with different flow of income during its life time. I making decision as regards the project to be chosen, the researcher will subject the decision making process to three decision making criteria; the net present value, internal rate of return, and the payback period. The data are presented below while the workings are provided as an appendix.
Section A: Calculating the Net present value, internal rate of return, and Payback Period
Case of Project Aspire,
NET PRESENT VALUE
Year  0  1  2  3  4  5  6 
Initial Investment  $2, 390, 000 = 2,250, 000 + 140, 000  
Inflow of Cash Increasing at 7.5%  650000  698750  751156  807493  868055  
Minus Variable costs Increasing at 6.75%  27 000  28 823  30768  32845  35062  
Minus Depreciation  600000  390000  345000  300000  240000  
Profit Before tax  23000  279928  375388  474648  592993  
Less Taxation in arears  0  4600  55986  75078  94930  118599  
Profit After Tax  23000  275328  319403  399570  498063  118599  
Add capital allowance  600000  390000  345000  300000  240000  
Total cash inflow  623000  665328  664403  699570  738063  118599  
Add Salvage value  0  0  0  375000  0  
Working capital  0  0  0  0  140000  0  
Annual cash inflow  623000  665328  664403  699570  1253063  118599  
Discount rate @ 10%  0.909  0.826  0.751  0.683  0.621  0.565  
Present Value  566369  549827  499166  477807  778027  66949  
Total of present value  2804247  
Minus the capital  2390000  
Net Present value  $414247 
Calculating the Internal Rate of return
The internal rate of return is the rate of interest that will equal the present value and the cost of the project. The process is usually a trial and error method where the researcher tries different rate and see their performance. The calculation of the IRR is as shown below.
IRR is the interest rate at which NPV is zero. The IRR at which project Aspire NPV is at 16.02405%.
Years  1  2  3  4  5  6  SUM of PV  NPV 
Cashflow  623000  665328  664403  699570  1253063  118599  
PVIF @ 10%  0.9091  0.826  0.751  0.683  0.621  0.565  
@ 10% interest rate NPV equals  414247  
Present Value and NPV @16%  537069  494447  425655  386366  596600  48678  2391459  1459 
PVs and NPV @ 16.024%  536958  494242  425390  386046  595982  48618  2390000  0 
Author Report, 2019
3^{rd} Method: Calculating the Payback Period
Years  Cash Inflow  Cumu
CashInflow 
Pay Back Period 
0  2390000  2390000  
1  623000  1767000  
2  665328  1101672  
3  664403  437269  3 years 
4  699570  262301  0.62505 
5  1253063  1515364 
The Pay Back Period equals 3 years 8 months.