Advanced Corporate Finance Assignment

Introduction

This coursework assignment consists of one piece of work divided into two parts. You should ensure that you answer all the sections.

Beverages & Spirits Ltd (B&S Ltd) has been manufacturing beverages.  In recent years B&S Ltd has noted that its costs have risen substantially and it is considering closing one or more of its production plants.

Projected annual future costs and revenues for each plant are as shown in Table 1. The projected costs and revenues are per unit. In all, B&S Ltd expects to sell 100,000 units of each beverage each year.

Table 1

Costs are in USD$ Factory Revenues Materials Labour Costs Overheads Orange 60 10 5 25 Apple 180 130 25 45 Peach 100 20 60 20 Pear 350 85 225 150

Each factory lasts, in total, for five years and then becomes obsolete. The initial cost of  each  factory  and  the  associated  research  and  development  costs  for  each beverage  were  as  shown  in  Table 2.  These were paid two years ago when production commenced.

Table 2 Factory                   Initial Cost($)                   Research and Development Costs ($) Orange                10,000,000                                    2,000,000 Apple                   15,000,000                                    5,000,000 Peach                   20,000,000                                    1,000,000 Pear                     30,000,000                                     2,000,000

B&S Ltd must  also  pay  a  service  charge  on  the  factory,  which  is  payable immediately if production at the factory continues. These are shown in Table 3. The service fee is not payable if production ends at the factory immediately; instead each factory could be sold for the amounts detailed in Table 3. These amounts will be realised only if production ends immediately.

Table 3

Factory Service Charge ($) Resale Value ($) Orange 10,000,000 4,000,000 Apple 2,000,000 8,000,000 Peach 3,000,000 3,000,000 Pear 6,000,000 7,000,000

Note: Depreciation is charged on a straight line basis over the life of the project. Research and development expenditure is treated in the same way. Ignore taxation.  The estimated cost of capital for B&S Ltd is 13%. B&S Ltd has $180,000,000 invested in index linked gilts which provide an annual return of 4%. B&S Ltd usually applies NPV and IRR investment appraisal methods. It does not currently use payback.

Required:

(a) Discuss   whether   B&S Ltd   should   rationalise   and   end production in any of the factories producing the beverages. If so, suggest which factories should be closed and explain your answer fully. Explain what reservations you may have.

(45 marks)

(b)  If B&S Ltd faced a shortage of cash [e.g. Bank Haircut] and was able to meet service charges up to a total value of only $10,000,000, which factories would B&S Ltd decide to keep open?

(15 marks)

(c) Discuss why the Internal Rate of Return method is used more often than NPV by financial directors.

(40 marks)

Overall assignment                                                                         (Maximum 3600 words-Quotations are not included)

Assignment Specifics:   

 Your report should be grounded in relevant theory – use the core and recommended reading.

 Reference all sources appropriately, using the Harvard Referencing System.

 Use Times Roman pt 12, with 1½ or double spacing.

 Pages MUST be numbered.

 Headings and sub -headings should be clear and visible.  

The text should flow smoothly, with each section leading naturally and logically to the next.Order Now

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