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AYR Co Project: AF4S31 Assessment 2 Brief

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.

This assignment will be marked out of 100%

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:

$
Year 1

Year 2

Year 3

Year 4

Year 5

600,000

390,000

345,000

300,000

240,000

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 five-year 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:

Capital Employed $million
Equity holder funds 20
Long term debt 18
Total 38

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

 

Section Weighting Criteria
1)            Calculation of NPV, IRR and Payback.

2)            Analysis evaluation and recommendation. Additional factors and information.

3)            Discussion of two sources of finance. Impact on WACC and investors/lenders.

30%

30%

30%

Demonstrate:

•       Relevant practical, academic and subject specific skills

•       Knowledge understanding and appreciation of issues involved.

•       Ability to research and provide practical and relevant points

•       Clear communication, explanation evaluation and discussion of aspects being covered.

Report

Structure and presentation

10% •       Clarity of layout, grammar, presentation and inclusion of all relevant matters

•       Tone and use of professional language

i.e. suitable for addressee of report

•       Accuracy of referencing, and appropriate use of appendices

 

 

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

 

Hand-in 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

Below is brief solution from the question. order to get custom solution from one of our Prof.

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

3rd Method: Calculating the Payback Period

Years Cash Inflow Cumu

Cash-Inflow

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.

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