FIN516: Corporate Finance – Tunnel Boring Machine – NPV Analyses – Report Writing Assessment Answer

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 D_AI_DDHA_IF
Code: FIN516
Corporate Finance Report Writing Assessment Answer
Assignment Task: FIN516
Question 1: FIN516
Wise Construction Limited is seeking to upgrade its ageing tunnel boring machine (TBM). The ageing machine is still able to excavate to capacity and excavate approximately 15 to 20 metres of tunnel boring per day on average. Due to its age, the old machine requires numerous skilled and unskilled labourers to operate the machine, remove the excavated materials, and provide other supporting roles. A new TBM with the same excavating capability has recently entered the TBM market. Due to technological improvements, the new machine claims to be far less reliant on both skilled and unskilled laborers required to support and operate the machine. The sellers claim the new machine can provide a 50% reduction in both skilled and unskilled labourers to operate the machine. The new machine will cost $12,000,000. Additional ongoing costs of $150,000 p.a. are required each year to train two skilled labourers to operate the new machine. Both costs are paid at the beginning of the project (t=0).
As the Chief Financial Officer (CFO), you are required to examine the financial viability of buying the new machine or continuing with the old machine. As the new machine provides the same excavating capabilities as the old machine, there is no expected change to the revenue stream. Your analysis should focus only on an incremental comparison analysis of the costs of buying the new machine versus the costs of continuing with the old machine. The following tables provide the relevant data for your analysis.

Question 2: FIN516

You are considering investing in Australian shares and decide to investigate the shares of two Australian companies: RIO Tinto Limited (RIO) and Woolworths Group Limited (WOW).
For this question please note:

Use the Yahoo! Finance website at http://au.finance.yahoo.com/ for data.

This question is to be done on a spreadsheet with the results posted and submitted in one Word document. Make sure that you show all your workings – for example, do not simply put down the covariance but show how it was obtained and this does not mean giving the Excel algorithm. Please do not give cell formulae, cell references, etc, as the reader should be able to follow from a table. Also please note using excel formula such as =COVAR() is not acceptable. As you must submit all questions in one word document you cannot submit a spreadsheet, neither can you submit a spreadsheet as an embedded object in a Word document. So after you construct your table in Excel please simply copy and paste into a Word document and remember to include all workings.

Find the monthly opening and closing prices for the period 1 January 2018 – 31 December 2018 for RIO, WOW and the Market as proxied by the All Ordinaries index (^AORD). 

Calculate monthly holding period returns (%) for the period 1 January 2018 – 31 December 2018 for RIO, WOW and the Market. The monthly holding period return is the percentage return

you would receive if you bought an asset on the first day of the month (opening price) and sold it on the last day of the month (closing price). (Use ‘Close’ rather than ‘Adjusted Close’ for the selling price and include any dividends). Show the formula and at least one sample calculation.

Graph your results on one graph with returns on the y-axis and time on the x axis.

Calculate the standard deviation of monthly holding period returns for RIO, WOW and Market.

Calculate the annual holding period returns for RIO, WOW and Market.

Calculate the covariances between RIO, WOW, RIO & Market, and WOW & Market over the year. 

Calculate the beta of both RIO and WOW. 

If average T bill rates in the year of 2018 were 2. 5% what would be the expected return of RIO and WOW according to CAPM? 

Identify and explain if RIO and WOW were fairly priced or not in 2018. 

Incorporating all the analysis explain which asset or combination of assets would you choose to invest in as a rational investor. 

Question 3: FIN516
1) Given the information in Table 1 below – calculate the following:

The book value of debt 

The book value of equity 

The book value of the company 

The market value of debt 

The market value of equity 

The market value of the company 

Table
Using the results you calculated in question 1 above – calculate the following:

WACC using Book Value 

WACC using market value 

Which are more relevant when calculating a firms WACC? Market or Book value weights. Briefly explain your answer
.

Question 4: FIN516

The Decision to Lease or Buy at Warf Computers
Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the microphone for the keyboard. Because of the required sensitivity of the microphone and its small size, the company needs specialized equipment for production.
Nick Warf, the company president, has found a vendor for the equipment. Clapton Acoustical Equipment has offered to sell Warf Computers the necessary equipment at a price of $3.6 million. Because of the rapid development of new technology, the equipment falls in the three-year MACRS depreciation class. At the end of four years, the market value of the equipment is expected to be $440,000.
Alternatively, the company can lease the equipment from Hendrix Leasing. The lease contract calls for four annual payments of $935,000, due at the beginning of the year. Additionally, Warf Computers must make a security deposit of $210,000 that will be returned when the lease expires. Warf Computers can issue bonds with a yield of 11 percent, and the company has a marginal tax rate of 35 percent.

Should Warf buy or lease the equipment?

Leasing vs. Borrowing. What are the key differences between leasing and borrowing? Are they perfect substitutes? 

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