AF4S31 Assessment 2 (V2) Brief This assignment will be marked out of 100% This assignment contributes to 50% of the total module marks. The assessments are bonded which means you need 40%+ over both...

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AF4S31 Assessment 2 (V2) Brief This assignment will be marked out of 100% This assignment contributes to 50% of the total module marks. The assessments are bonded which means you need 40%+ over both assessments combined to pass the module. Learning Outcomes to be assessed As specified in the validated module descriptor available at: https://icis.southwales.ac.uk/studentmodules/10122/studentmodulespecifications Learning outcome 1 The ability of students to critically assess, apply and evaluate the issues and techniques of strategic financial management. Grading Criteria Please see School’s marking criteria for undergraduate/post graduate assessments on the module VLE. Any additional grading/marking guidance will be posted with assessment task below. Assignment AYR Co. is considering two separate projects known as ‘Aspire’ and ‘Wolf’ which are quite different but each of which has the potential to increase AYR Co.’s market share. To date $120,000 has been spent on market research into the increase in demand that can be expected for each project. The next stage is to conduct a financial appraisal to determine which project should be taken forward as AYR Co. can only afford to fund one project at this time. Project Aspire: This project will require the acquisition of plant and machinery costing $2,250,000 which is payable immediately. This machinery will have a scrap value of $375,000 at the end of the 5 years. There is also $140,000 working capital to be used immediately. This amount has been taken from the company’s retained profits and will be repaid at the end of the project. Cash inflows are expected to be $650,000 in year 1 rising at a rate of 7.5% per annum for years 2 to 5 inclusive. Variable costs in year 1 are expected to be $27,000 per annum and are expected to rise at 6.75% per annum. Capital allowances are available on the plant and machinery as follows: $ Year 1 Year 2 Year 3 Year 4 Year 5 600,000 390,000 345,000 300,000 240,000 This project will expand the current product range and will appeal to existing and potential customers. https://icis.southwales.ac.uk/studentmodules/10122/studentmodulespecifications Project Wolf: This project will require an immediate outlay of $2,250,000. This expenditure will not attract capital allowances. Annual cash inflows of $955,000 are expected to be constant for the life of the project. Material costs are expected to be $14,400 in the first year, rising at an annual inflation rate of 7.5% per annum. Other expenses are expected to be $18,000 in year 1 and these are expected to fall by 7.5% per annum over the life of the project. To undertake Project Wolf, factory space which is currently generating rental income will need to be used for the project. The rental income, which would not have been expected to change over the five-year period, is $75,000 per annum. This project will take the company in a new direction appealing to a different type of customer. Additional financial information:  Corporation tax is paid at a rate of 20% and tax is payable one year in arrears.  The weighted average cost of capital is 10% and, unless otherwise stated, cash flows occur at the end of the year to which they relate.  A straight line method of depreciation at a rate of 20% is applied to all non- current assets. The initial investment of $2.250m, for whichever project is chosen, is significant in terms of value for AYR Co. The board of directors is considering ways to finance the investment, and will choose between, increasing equity by issuing new ordinary shares, or taking on new debt in the form of a bank loan at a fixed rate of interest. AYR Co. is currently financed as follows: Capital Employed $million Equity holder funds 20 Long term debt 18 Total 38 Required: Prepare a report to the Directors of AYR Co. which includes the following. 1. A calculation of the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period for projects Aspire and Wolf. Detailed calculations should be included as an appendix to the report. All cash flows should be rounded to the nearest $. 30% 2. Analysis and evaluation of the investment project options as follows: i. A recommendation regarding which project (if any) to undertake; ii. Justifications for your recommendation including an evaluation of the investment appraisal techniques used in task 1 above. iii. A summary of other factors that should be considered and information that may be needed prior to making a final decision. 30% 3. A discussion of the two sources of finance being considered by the board of AYR Co. Your report should include: i. A description of Equity and Debt. ii. An explanation of the costs of each source of finance. iii. An analysis of the effect the selection of the source of finance may have on AYR Co.’s weighted average cost of capital. iv. An assessment of the impact of the selection of finance on current and potential shareholders and lenders. 30% Marks are available for presentation of the report, which must not exceed 3,000 words. 10% Total 100% Marking guidance Section Weighting Criteria 1) Calculation of NPV, IRR and Payback. 2) Analysis evaluation and recommendation. Additional factors and information. 3) Discussion of two sources of finance. Impact on WACC and investors/lenders. 30% 30% 30% Demonstrate:  Relevant practical, academic and subject specific skills  Knowledge understanding and appreciation of issues involved.  Ability to research and provide practical and relevant points  Clear communication, explanation evaluation and discussion of aspects being covered. Report Structure and presentation 10%  Clarity of layout, grammar, presentation and inclusion of all relevant matters  Tone and use of professional language i.e. suitable for addressee of report  Accuracy of referencing, and appropriate use of appendices Assessment guidance Your report should be word processed, clearly laid out and concise and should be supported by appropriate workings for the numerical elements. The word limit for the report is 3,000 words. The text of this assignment must be in your own words (not even a sentence or phrase should be taken from another source unless this source is referenced and the phrase placed in quotes). It is dishonest not to acknowledge the work of other people and you open yourself up to the accusation of plagiarism. Referencing should in accordance with the Harvard System. A guide published by the Library lists the most common types of references with examples. The guide can be found on the module VLE Hand-in requirements and dates: Please see the VLE PLEASE NOTE THAT IF YOU ARE EVEN ONE MINUTE LATE UPLOADING YOUR FILE THIS WILL COUNT AS A LATE SUBMISSION AND THE APPROPRIATE PENALTY WILL APPLY.
Answered Same DayFeb 06, 2021

Answer To: AF4S31 Assessment 2 (V2) Brief This assignment will be marked out of 100% This assignment...

Nitish Lath answered on Feb 10 2021
153 Votes
PROJECT INVESTMENT DECISION
PROJECT INVESTMENT DECISION        15
FROM:
DATE:
SUBJECT: PROJECT INVESTMENT DECISION
Abstract:
The report deals with the analysis of the two investment projects of the AYR Company such as Aspire (to be referred as AE) and Wolf (to be referred as WF) to decide the profitability of each investment alternative. Further based on the project data, the report also provides advice on the capital expenses of the company. In this report the IRR, payback and NPV of the project is calculated and selection of the investment opportunity is based on this project. Since both the projects is having equal internal rate but the AE investment alternative will be preferred b
y the officers of the company due to higher cash flow as compared to other option. Further various factors also have to be taken care in selecting the project of the company.
TABLE OF CONTENT
    Sr. No.
     Titles
    Page no.
    1.
    Introduction
    4
    2.
    Assumption in the calculation of cash flow from the projects
    5
    3.
    Analysis of project Investment
    6
    
    Calculation and Analysis
    6
    4.
    Interpretation of two projects
    8
    5.
    Additional factor and information in selecting the project
    9
    6.
    Different foundations of finance
    11
    7.
    Financing cost analysis
    12
    8.
    Analysis of effect on WACC of the company
    13
    9.
    Assessment of the impact on potential shareholder
    13
    10.
    Conclusion
    14
    11.
    References
    15
    12.
    Appendix
    17
Introduction:
The capital appraisal technique is type of the budgeting management process which supports the organization to determine and analyze the short and long- term investment. This technique uses various methods to select the viability of the investment option which includes IRR, NPV, payback and profitability index. In this report analysis is made regarding the ability of the project of the entity to enhance the market share and hence the focus is on the facility of the investment option to produce the cash flows.
The three most important methods which are used in the selection of the alternatives in the projects such as IRR, payback and NPV (Sham G. 2018). The NPV and IRR is on the basis of the discounted method or the time value of money. The detailed discussion of the methods of investment budgeting is as follows:
1) Net Present Value: This method deals and determines the financial inflows of the preliminary outlays at the specified time and at the particular rate at which flows have discounted. It calculates the difference between the current value of financial inflows and current value of currency outflows. When the current value of currency inflows is higher than that of cash outlays then the investment option will be accepted as NPV is considered as positive and vice versa.
NPV = current value of currency inflows – current amount of cash outlays
2) Internal Rate of Return: This technique also takes time value of money into consideration and it can be defined as the rate at which NPV is nil. In other words, this is the discount rate at which the current value of currency inflows is equal to the current value of currency outflows. Thus, it analyzes the productivity of the investment such as when the cost of investment option is more than IRR then the option will be not accepted and vice versa. The IRR can be calculated as below:
                                            
3) Payback period: In this method, the time essential to earn back the starting amount of outlays of the project is calculated. According to this method the project which is having shorter payback period is preferred by the officers of the entity. The following formula is used to compute the payback period of the projects for the unequal currency flows:
Payback period = X + Y/Z
Where
X represents the time period where the currency inflows are negative cumulatively
Y represents the currency flows at conclusion of Y
Z represents currency flows after tenure X
Assumptions in the calculation of cash flow from the projects:
· The research expenditure is considered as sunk cost as it is already incurred and unable to be earned back for both the options and thus $120,000 is not considered in the computation for both the alternatives or options.
· The venture life and initial outlays in both the options are equal such as life of project is five years and initial outlay is $2,250,000.
· The change in the net current assets is not considered in the computation as there is no clear detail whether capital is equally distributed over the life of the project or it trails the increase in the expenditure rates. Thus, it is decided not to consider into account working capital in calculation as it is critical to decide whether this have increasing or decreasing impact on the currency flows from the investment option.
· The corporation tax rate of 20% is considered for the calculation of the tax benefit in connection with capital allowance.
· The discount rate is assumed as 10%.
Analysis of the project Investment:
Calculation and Analysis:
While calculating the viability of the projects above mentioned assumptions are kept in mind and detailed computation are shown as part of appendix.
1) Net Present Value:
This method is the most basic technique used in the assessment of the project which includes analysis of the discounted currency flows and in this technique future currency flows are discounted as per the current tenure. Hence it gives healthy comparison basis among the currency flows. Accordingly, when the current value of currency inflows is bigger than the currency outlays then the project will be accepted and vice versa (Bierman, H. and Smidt, S. 2007). In case of two separate investment option, the option with the higher net present value will be finalized. In the given case the discount rate ten percent is used to determine the NPV of the two proposed options and the findings can be interpreted as below:
    Option Name
    Option AE
    Option WF
    NPV
     466,845
     378,784
The positive NPV represents profit from the projects and both the projects are generating profit for the company.
2) Internal Rate of Return (IRR):
It is the rate at which the net present value of the project is nil i.e. the present value of cash inflo is equal to the present value of cash outlay. The IRR plays an important role in selecting the project as when the IRR of the project is higher than the cost of financing then the project will be accepted. The higher IRR is generally preferred and in the given case the cost of capital is 10% and in order to accept the project the internal rate of return should be greater than the 10%. The findings from the calculation of IRR can be discussed as below:
    Project
    Project Aspire
    Project Wolf
    IRR
    17%
    17%
3) Payback Period:
In this method the period required to get back the initial investment of the option is calculated. According to this method the project which is having...
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