Unit: AFCM 202, Financial Management
Program: Bachelor of Business
Trimester: 2, 2014

Assignment Instructions

Objective
This assignment is designed to develop your understanding of present value technique.

Case

John Malcom, manager of the Dairy Products Division of FitzGerald Famous Foods Limited, was pleased with his division’s performance over the past three years. Each year, divisional profits had increased and he had earned a large bonus. Bonuses are based on the division’s reported income. John also received considerable attention from senior management. A vice president told him that, if his performance over the next three years matched the first three, he would be promoted to higher management. Determined to meet these expectations, John made sure he personally reviewed every capital budget request. He wanted to be certain that any funds invested would provide good, solid returns. The division’s cost of capital is 12%. At the moment, he is reviewing two independent requests. Proposal A involves automating a manufacturing operation that is currently labour-intensive. Proposal B centers on developing and marketing a new ice cream product. Proposal A requires an initial outlay of $275,000 and proposal B requires $325,000. Both projects could be funded given the status of the division’s capital budget.
Both have an expected life of six years and have the following projected after-tax cash flows:

Year Proposal A Proposal B
$ $
1 150,000 -­-37,500
2 125,000 -­-25,000
3 75,000 -­-12,500
4 37,500 212,500
5 25,000 275,000
6 12,500 337,500

After careful consideration of each proposal, John approved funding of Proposal A and rejected Proposal B.
Required:
The Directors of FitzGerald Famous Foods are not confident that John made the right decision. The Directors have asked for your advice which should take into account the following points:

a) List and briefly explain the methods that the company could use to evaluate a potential investment. How are these methods related to each other, if at all? Which method is the most effective? Why?

b) Calculate the NPV for each proposal. Explain each answer.

c) Calculate the IRR for each proposal. Explain each answer.

d) Calculate the payback period for each proposal. Explain each answer.

e) Based on your analysis, do you agree with John’s choice of Proposal A? Why or why not? Justify your advice to the
Board.
+++++++


General instructions

This assignment may be completed and submitted on either an individual or small group basis. A ‘small group’ can consist of two or three students. Groups are responsible for selecting and managing their own members.

Whether completing the assignment on an individual or group basis, you are free to discuss material and the assignment questions with your fellow students. However, the final assignment, when submitted, is expected to be unique, with regard to both form and content.

Assessment value

This assignment is worth 15% towards your semester aggregate. Attempt all five (5) questions. Each question carries 10 marks for a total of 50 marks, convertible to 15%.

Due date

Your assignment must be submitted by 4.00pm, Thursday, 17 September AEST (Week 8). Students are encouraged to submit assignments comfortably before the close-off time.

Length
1500 words (+/-10%), excluding reference list, diagrams, headers, footers.

Submission
Should you need an extension, please ensure that you have made application comfortably before the due date.

Other important points:

• Treat each of the questions discreetly. Therefore, answer each of the specific questions as they stand.
• You are required to demonstrate scholarly discussion, critical and analytical skills and to express your position effectively on any issues uncovered.
• You are encouraged to use the resources of the library.
• Please observe normal academic conventions with regard to layout, formatting, in-text referencing and sourcing. A conservative style of presentation is preferred, using Times New Roman, Font Size 12, or similar. Please avoid using over-sized fonts, excessive artwork and other eccentricities.
• A reference list should be presented at the end of the assignment.
• Do not submit your assignment in plastic sleeves or a binder. The pages of the assignment should be simply stapled in the top left hand corner.
• Late submission, unless authorized, will be penalised.

See your lecturer if you have any specific queries.

Dr Mark St Leon
Lecturer
Kent Institute of Business & Technology, Sydney
18 August 2014