The assignments in FINM1416 consist of two components: an individual component (50%) and a group component (50%). The individual component is due before the first workshop session commences (Monday 10 October 11:30am). The group component will commence during the Workshop (see timetable) where you will work with your team and staff is there to help ensure you are on the right track.

Preparation

The purpose of this workshop is to evaluate a capital budgeting decision and recommend a course of action. Make sure you have completed Module 7-9, Tutorial 7-9, and lecture 4 and 5, and understood the material covered. Not doing this will likely cause confusion and extend the time you need to spend on this workshop.

NPV Problem

Ze-Bikes, Ltd (ZB) is a company that has been selling e-bikes for the past 10 years. They are now considering a new   generation of e-bikes, a “Ze-Bike” . These Ze-bikes are more efficient and require less electricity; 1) they have              extendable solar panels that can charge the bike even when riding, and 2) it uses a “hybrid” technology that charges the bike when going downhill.

Undertaking this new bike would require new machinery, and six small 3D printers to print parts. Ze-Bike wants to remain competitive and therefore expects that if the product sells well, they will want to produce an upgraded      version of the bike in 6 years and cease producing the original model.

You have worked for ZB for a year now, and your manager has asked you to help analyse the potential new product. Your team has collected the following estimations and grouped them into two areas: 1) Revenue & Costs, and 2)       Capital Expenditures (Machinery and 3-day printers).

1.   Revenue & costs

•    ZB conducted market research (costing $40,000) showing that annual sales are expected to be around 9,000 Ze-Bikes in the first year and is expected to grow at 12% per year over the next six years. It has also invested $80,000 in R&D to come up with the design and technology for the Ze-Bike.

•    Each Ze-Bike will be sold for $4000 in the first year. The price will increase at the inflation rate over the next six years.

•    If the new Ze-Bike launched, ZB estimates that net revenue from their existing e-bikes will decrease by $5,000,000 per year (5,000 bikes *$1000 per bike).

•    Variable costs of production are $1000 per bike for the first year. The costs will increase at the inflation rate over the next six years.

•    Fixed costs of production are $1,000,000 per year.

•    Administrative costs for the company will increase by $180,000 per year because of the new product line. However, this new line of bike production will be charged with an annual share of the business’s                 administrative costs, totalling $100,000 per year.

•    If ZB launches the new bike, they will increase their box order with CustomBoxCo, reducing their per-unit box cost on other product lines. This is estimated to save $30,000 per year.

•   The company will produce its product in a part of their current factory, which it currently rents out for $160,000 per year.

•   To finance this new production line, the company will borrow part of the capital required from the bank, with an interest cost of $24,000 per year.

2.   Capital Expenditures

•   The bike solar panel assembly system will cost $12,400,000. At the end of 6 years, the solar panel is estimated to be sold for $3,000,000.

•    ATO regulations require depreciation over 20 years to zero using the straight-line method.

•   The hybrid technology machine will cost $5,000,000. At the end of 6 years, the machine is expected to be sold for $2,500,000.

•    ATO regulations require depreciation over 10 years to $100,000 using the straight-line method.

•   The total cost of the six required 3D printers is $3,350,000. At the end of 6 years, the estimated value of the 3D printers is $2,200,000 and will be sold.

•    ATO regulations require depreciation over 10 years to zero using the straight-line method.

Additional Information

•   The project will require working capital of $15,000 which will be recovered at the end of the 6-year life of the project.

•    ZB faces a corporate tax rate of 30%.

•    ZB estimates the cost of capital for this project at 17%.

•    ZB’s policy is to reject projects with a payback period of more than 4 years.

•    Inflation rate is expected to be 3%.

Required :

Part 1 – Individual Component (due Monday 10 October 11:30am)

You will need to complete the following parts of the Excel template and submit your answers to the following questions on Blackboard.

Q1: Which cash flows are not-relevant? Why? Fill out the yellow items in the sheet “Inputs”, and in your template highlight the non-relevant items in red (to be submitted in Q6). (10 marks)

Q2: Calculate the net-proceeds at the end of the project for the three capital expenditures. What are the net-       proceeds for the solar panel assembly system? The Hybrid technology machine? The 3D printers? Fill out the light blue items in the “inputs” sheet (to be submitted in Q6). (10 marks)

Q3: Calculate after-tax free cash flow in the sheet “Cash Flows” . What is the project’s initial (year 0) investment     outlay? What are the project’s Years 1, 2, 3, 4 and 5 after-tax free cash flow? (they should be different, as we have growth rates for several inputs) What is the project’s terminal (year 6) after-tax free cash flow? (12 marks)

Q4: What is the project’s NPV? IRR? Payback period? (8 marks)

Q5: Should the company accept or reject the project? Why? (8 marks)

Q6: Upload your workings in the Excel template. (2 marks filling out template according to instructions)

Part 2 – Group Component Assignment (2hrs online session plus group assignment due Wednesday 19 October 2pm)

Similar to previous workshop 1, 2 and 3, you will be assigned to a group of around 3-5 students. You again have the       opportunity to change groups, just fill out this form. The groups and discussion boards will be available when you start your online workshop. The discussion board is mostly used for file sharing, but can also be used for written                     communication for your group. You must attend the workshop to get marks for this component, and you must join the session within the first 10 minutes.

First 10min: Introduction to workshop. Your first task is to upload your answers to your groups’ thread. This is a crucial and necessary part of starting your group task.

Remaining workshop time: Review and discuss the different answers of your group members. Then, begin to brainstorm and write up the answers for your group report (up to 1000 words):

1.    Explain which inputs are irrelevant and the reasons. (6 marks)

2.    What are the final NPV, IRR and payback values? (attach the completed excel file as a separate file) (10 marks)

3.    Were there any differences in your individual excel files? Where did they come from and how did you

resolve them? (if no differences were identified, list what was most challenging about this exercise and why). (8 marks)

4.    Conduct a scenario analysis. ZB considers 5 different scenarios (probabilities provided) are possible for the    next 6 years. The scenarios are from worst case to best case in terms of economy and regulation. Depending on the political party elected, there will be more subsidies, incentives and infrastructure in place for cycling.

Report the findings of your analysis in Excel. Bar Charts that illustrates the NPV, IRR and payback period of the project under all the scenarios will be useful. (10 marks)

5.    What additional analysis do you think is useful to conduct? Conduct the analysis, and explain what it means and why it is useful. (8 marks)

6.    Your recommendation to the board regarding the project. Explain which capital budgeting method(s) you have relied on and the reasons, should a conflict in decision arises for different methods. (8 marks)

You should attach your Excel analysis as an appendix (not counted in the word count).