Corporate Finanace: Capital Budgeting Methods- A33-200 Aircraft- Report Writing Assignment

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MAS7515
Report Writing Assignment:
Part A – Written assignment
Background
Read the article ‘Capital budgeting methods used in some European countries and in the United States’ which comments on the different capital budgeting methods, both discounted and non-discounted used by finance managers in Europe and United States. This article found that the most popular capital budgeting methods used by American companies are net present value and internal rate of return, whereas European companies are generally using simple payback period for evaluating their project.
The article that forms the basis for this assignment is:
Szucsne Markovics, K 2016, ‘Capital budgeting methods used in some European countries and in the United States’, Universal Journal of Management, vol. 4, no. 6, pp. 348–360.
Required
You are required to prepare a report. Your report must address following:
1. Why the calculation of net present value leads to better investment decisions than other criteria? Provide evidence from the article.
2. ‘A great proportion of companies frequently apply non-discounted payback period to evaluate investment projects’. Discuss the reasons for different capital budgeting practices used by developed countries and less developed countries mentioned in the article.
3. The management of Global Travel Express Ltd (GTE) is considering the replacement of its existing fleet of seven A330-200 aircraft with three B797-500 aircraft. The following forecasts for each aircraft fleet have been calculated.

Management is also aware of the development of the D474-800, which the manufacturer estimates will be available in 5 years’ time. The following forecasts for a D474-800 aircraft have been provided by the manufacturer.

Management cannot foresee any further developments beyond the D474-800 aircraft.It is considered that two of the new D474-800 aircraft can carry the forecast number of passengers including any freight work required. Other information is as follows:
a. The annual net cash flows are received at the end of each year.
b. The company’s after-tax cost of capital is 10 percent per annum.
c. The A330-200 aircraft are assumed to be fully depreciated.
d. Straight-line depreciation may be assumed.
You are required to advise management whether they should:
1. Replace the A330-200 aircraft with the B797-500 aircraft now, and replace the latter with D474-800 aircraft in 5 years’ time.
2. Retain the A330-200 aircraft for 5 years, and then replace them with D474-800 aircraft.
3. Replace the A330-200 aircraft with the B797-500 aircraft now, and replace the latter with the D474-800 aircraft in 10 years’ time.
Other alternatives are not to be considered.
You are required to provide calculations set out in table format using excel for the three alternatives GTE ltd is considering. Also, provide management with a detailed recommendation as to which alternative should be undertaken.
 Part B – Reflective practice activity
As the newly appointed finance manager of a large listed corporation, you are looking at including an additional two securities to an already established AUD$ 2.3 billion securities portfolio. The first being ordinary equity issued by an Australian mining company. The company recently paid a $ 0.80 dividend. Over the last 7 years, the company’s dividends have grown from $0.40 cents in 2011 to a current level $0.80 in 2018 which can be assumed as a proxy for the growth rate of the company going forward. These shares are currently selling for $13.52. You have decided to utilise the capital asset pricing model (CAPM) to determine the expected rate of return. The estimated Beta of the mining company is 1.8, with a market risk premium of 7.5 and a risk-free rate of 2.6 percent p.a.
The second investment, additional tier 1 capital notes (bond) recently issued by an Australian financial institution to meet its capital funding requirements under the new global BASEL Capital Accords. The notes were launched and priced into the US capital markets, however, all proceeds including coupon payments have been swapped back into Australian dollars (AUD). The bonds have a par value of AUD $100.00, pay quarterly coupons at a rate of 4.8% and matures in exactly 30 years. For notes of this investment grade, you believe that a 5.5 % p.a. rate of return is appropriate. The notes are currently trading at AUD $93.50.
Required
Using your knowledge gained from this subject, calculate the value of each security. Critically evaluate both securities using both quantitative and qualitative analysis. Recommend whether you would add them to the company’s existing securities portfolio or not.

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