FIN20014_Kaplan_Financial Management: Individual Assignment
Study Period 2, 2015
1 | P a g e
Faculty of Business and Law
Higher Education Division
FIN20014 (Kaplan) Financial Management
Study Period 2 2015
The objective of this assignment is to encourage the students to
use excel spreadsheets to aid
in problem solving. Students are asked to solve a capital
budgeting problem using an excel
spreadsheet.
Weighting: 20% of total assessment
Due Date: Sunday 2nd
August at 11:55 pm [SG Time]. Submit your assignment online
through TURNITIN via Blackboard.
Late Submissions: You must contact unit convenor Miraj Ahmmod
([email protected])
directly and make alternative arrangements should you not be
able to
submit your assignment in due time. Assignments will not be
accepted
after 11.55 pm (SG Time] on Sunday 2nd
August unless an arrangement has
been made directly with the convenor.
Format: The assignment is a problem solving exercise using an
excel spreadsheet
with additional discussion on findings, forecast errors and
risk.
Documents: Students should submit the following documents ALL
MERGED in ONE
FILE (either doc or pdf) only
an assignment COVER sheet
a copy of their formal REPORT
a copy of their excel spreadsheet with VALUES
a copy of their excel spreadsheet with EXCEL FORMULAS
Online Submission: Link and details will be available on BB
under Assessment folder.
Details of Assignment
The General Manager (GM) of RUNWELL Corporation needs a detail
analysis on an exciting proposal to introduce a new line of vehicle
parts for environmental protection against carbon emission.
Starting the production line requires renovating one existing
section of the factory. It will be a B2B contract based project
that will continue for eight years. Its projected that
technological up-gradation of car manufacturing process will make
this production line obsolete in ten years time. In winning this
contract through a bidding process, the company has spent $41,000.
Required renovation can be conducted immediately at a cost of
$130,000 that includes installation cost of new plant and equipment
(P&E). The contract requires annual quality assurance
inspection that will cost $36,000 per annum. The procurement of HR
will be one-off cost at the beginning and estimated to be $48,000.
For successful start and continuation of the project, management
also needs to finalise issues with employee union leaders for
utilizing existing workers with training.
FIN20014_Kaplan_Financial Management: Individual Assignment
Study Period 2, 2015
2 | P a g e
A local distributor of a Japanese company can immediately supply
all required parts and accessories of the new P&E for a total
charge of $1,400,000 including import duty of $210,000. In
addition, transportation cost of $40,000 and installation costs of
$70,000 are to be incurred for new P&E. These P&E would be
depreciated over its useful life of ten years using a tax allowable
straight line rate of 10%. However, the company can sell the
machine at the end of the contract for $250,000 after incurring an
additional cost of $24,000. The company has decided to capitalise
total renovation costs to new P&E. RUNWELL will be in contract
to supply 48,000 boxes of the parts per year and that will require
RUNWELL to operate at 80% of its capacity when variable operating
cost will be 50% of sales. Selling price per box will be $30.
Annual fixed operating cost, excluding depreciation, will be
$160,000. It is estimated that the production line will operate at
full capacity during the last four years due to increasing demand.
Variable operating cost at full capacity would be 45% of sales.
Existing section of the factory, where the new P&E will be
installed, is in use by a subcontractor who pays monthly rent of
$2,500. Therefore, RUNWELL has to forgo the rent income once the
new production line commences its operation. In addition to initial
employee training cost of $26,000, there will be additional
training expense of $18,000 in the first year. It is also estimated
that the new production line will require an initial increased
investment of $51,000 in stock and $23,000 in debtors that are
offset by an increase in creditors of $25,000. The firm has a 14%
weighted average cost of capital (WACC) and is subject to a 30% tax
rate. The required discounted payback period is 5 years. The GM
hesitates to take the final decision because of unexpected growth
in car manufacturing technology. RUNWELL has an offer to sell the
contract to another compliant company for $200,000. The GM also
asks whether or not the discount rate should be increased to allow
for the risk of the above contract or is the WACC appropriate?
Required
Using Excel Spreadsheet prepare a full analysis to be presented
to the GM of RUNWELL Corporation evaluating whether the existing
product line should be renovated for the new product line. Your
analysis should include the following
Table of cash flows
Use of excel formulae where appropriate
A written report (1200 words, +/- 10%) outlining your
recommendation as to whether RUNWELL Corporation should proceed.
Justify your recommendation and your analysis of risk. Also
describe the pros and cons of new product line.
Marks will be awarded for:
Set out of spreadsheet i. Ease of reading spreadsheet
ii. Use of excel formulae in organised spreadsheet iii. Correct
application of theoretical model
Overall presentation of answer including the written report.
* Carefully read the following Marking Rubric on page-3 for
required components and
presentation of formal report.
