Instructions:

GROUPASSIGNMENT

MCR006FinancialManagement T1 2025

• CompletetasksA,BandAlltasksaremandatory,butyouhavetwoalternativestochoosebetweenin task C. These are tasks C1 and C2. This assessment is worth 40 grade points and is marked out of 100

• Theassessmentsubmissionlinkwillcloseat15h30onFridayApril4,2025(Sydney/Melbourne time). Submissions after that will not be able to be made except in cases of special consideration.

• Please include a cover sheet as the first page of your group assignment. The cover sheet should detail thenamesandstudentIDsofallcontributingmembers.Onlyonememberofthegroupistosubmit.

• Ifoneofyourteamdoesnotrespondtocommunications,theresponsibilityoftheremainingteam members will be to complete the assessment and submit it by the deadline.

• If a student has not contributed in a meaningful and substantial way to the group assignment, that studentsnameisnottobeputontheassignmentcoverSuchstudentscannotbeassessedfora score.
• Ifyouareamemberofagroupwhoexperiencesnoornegligiblecontributionfromastudent,youareto alert the academic staff promptly. We have ways to deal with this including pairing students together who have not engaged or asking them to do the work as individual contributors. However, before changing the make-up of a group, your tutor will check with the students concerned to satisfy themself that everyone has had a fair chance to start contributing.

• Resourcesfor theassignment include

• Theelibrary forresearchwhichis providedonline through Moodle
• Theprescribedand secondarytextbooks referencedon theunit outline
• Othertextbooksandinternet sitesdealingwiththeCAPMandCapital Budgeting
• Lecturenotes andtutorial documents

• WhenusingExcel,donottypein(=hardcode)yourresultinaDeriveallresultsbycalculations that the marker can see. If your Excel spreadsheet type in your results we do not know that you have understood the process and will not be able to reward you with marks.

• IfyouaredoingtasksA,BandC1,create4tabsonyourExcelspreadsheetasfollows

• Thefirst tabis asummary of yourresults forTaskA,B and
• The2nd tab is forthe detailed Task A workings
• The3rd tab isforthe detailedTask B workings
• The4th tab isforthe detailedTask C1 workings
  • Youwill submitthecover sheet andtheExcel

• IfyouaredoingtasksA,BandC2,create3tabsonyourExcelspreadsheetasfollows

• Thefirsttab isasummary ofyour resultsforTaskAand
• The2nd tab is forthe detailed TaskAworkings
• The 3rd tab is for the detailed Task B workings (NotethatnospreadsheetworkisrequiredinTaskC2)
  • Youwillsubmitthecoversheet,TaskC2onaWorddocumentandtheExcel

Task AWACC(35 marks)

Itisnowthe30November2024.BelowaredetailsofaminingcompanyinAustralia called Digem UpLtd. All monetary amounts are Australian dollars.

• Thecompanyhas alargebatchofunsecurednotesorbondsoutstanding thatitissued5yearsagowhen coupon rates were low around the world. Details:

• FaceValue$3550M
• Termto Maturity(TTM)is5 years
• AnnualCouponRate16%
• Couponinterestpaidsemi-annually
• AdvertisedyieldtomaturityforbondswithsimilarriskandTTMacrossotherminingcompanies is 6%.

• The company also has a smaller batch of green notes outstanding that were only recently issued and havehighercouponratesdueto industrialcompanycouponrateshavingrisenalotinrecentyearsdueto high inflation and a high cash rate in Australia (normally coupon rates on green bonds would be lower than those on traditional bonds. These securities were bought by ethical investors or those wishing to support projects with environmentally sound credentials. Details:

• FaceValue$800M
• Termto Maturity(TTM)is7 years
• AnnualCouponRate2%
• Couponinterestpaidsemi-annually
• AdvertisedyieldtomaturityforbondswithsimilarriskandTTMacrossotherminingcompanies is 5%

• ThefirmhasatermloanwhichitcontractedwithasyndicatedofDetails

• CarryingAmount oftheloan onthe balancesheet is $986M
• Theloaninterestratehad avariablecomponentbeingLIBORplusafixedLIBORon30 November 2024 was 4.85%. The fixed margin is 2.75%

• ThefirmhasoutstandingleaseDetails

• CarryingAmountoftheleaseliabilitiesonthebalancesheetis$755M.Thisisbasedonthesum of the present value of lease commitments payable to the leasing companies (= lessors).
• Thesum oftheundiscounted valuesofthe amounts payable tolessors is $1108M
• Theweighted averagetime to maturityof theleases is 7.25
  • DigemUphas3077Mordinarysharesoutstandingwithasharepriceof$22.60.Thebetaofthe companys shares is 1.52. The companys effective tax rate is 28%.

• Themarket(orequity)riskpremiumis7%
• AdvertisedyieldforAustralianGovernmentbondswith10yearstomaturityis52%

Required:Calculatethe WeightedAverageCostofCapitalusingtheclassicalWACCformula.

TaskB-CapitalInvestmentAnalysis(Augmentingcapacity) (30marks)

OutsideComfortZoneFashionDesigners&ManufacturersPtyLtdinMelbourneisconsidering investingin some new equipment. This new equipment will generate new sales revenues, but it will not replace any existingequipment.Theequipmenthasa3-yearlifefordepreciationpurposesunderAustraliancompanytax regulations and would be fully depreciated by the prime cost method (= straight-line method with no residual) over those years. It is planned to close the project at the end of Year 3.The entity will need to increase its net operating working capital at the beginning of the project, but no further increases are foreseen. Revenues and other operating costs are expected to be constant over the project's life.

1. Determinethe cashflowsassociatedwiththis
2. Whatistheinvestment's NPV?
3. Whatisthe InternalRateofReturn(IRR)oftheinvestment?
4. WhatistheProfitabilityIndex(PI)oftheinvestment?
5. Withappropriatejustification,brieflyexplainwhetherthecompanyshouldundertakethe investmentor

TaskC(35 marks)

Youhave2 options to choosebetween:

TaskC1-CapitalInvestmentAnalysis(EquipmentReplacement) Task C2 - A report on the Capital Asset Pricing Model

Ifyou decideto do both C1and C2, wewill only mark C1

TaskC1-CapitalInvestmentAnalysis(EquipmentReplacement)

Blunt EdgePty Ltd is a tool manufacturing company based in Sydney. The entitys income tax rate is 30%. Itisconsideringthereplacementofamanuallyoperatedmachinewithafullyautomatedmodel. Onemanis currently needed to operate the machine. This costs the company $120,000 p.a. in wages, holiday loading, superannuation payments and other remuneration-connected expenditure. The $120,000 includes amounts spent on paying for labor when the normal operator goes on holiday or calls in sick. The machines maintenance costs are $8,000 per year.

The manually operated machine was bought 2 years ago for $50,000. The Australian Tax Office schedule includes the asset in the 10-year useful-life category and only allows prime cost depreciation (with no residual)forthistypeofequipment.Thisiseffectivelythestraight-linedepreciationmethod. Thecompany believedthatthemachinenormallywouldbetakenoutofserviceatthe10-yearpoint.Thecurrentdisposal value of the machine presently in use is $42,000. We are confident we will receive that in the second-hand equipment market.

The new model has a purchase price of $200,000. Shipping and installation would cost $15,000. Maintenanceonthenewmachinewouldbe$17,500p.a.buttheadoptionofthatmachinewouldcutthecost of defects from $5,000 to $1,250 per year.

Thenewmachineisinan8-yearusefullifetaxcategoryandagainprimecostdepreciation(withno residual) is the only method available. As the machine will undergo heavy use, the company believes the 8 years may be quite accurate.

Required:

1. Determinethe cashflowsassociatedwiththis
2. Giventhat the requiredrate ofreturn is11%, compute theNet Present Value(NPV)
3. WhatistheInternalRate ofReturn(IRR)oftheproject?
4. WhatistheProfitabilityIndex(PI)oftheproject?
5. Adviseifyouwouldorwouldnotrecommendreplacingthemanualmachinewiththeautomatedoneand why?