TFIN501 NA T1 Individual Assignment Solution

TFIN501 NA T1 INDIVIDUAL ASSIGNMENT 

Total Marks: 100 marks; 

Weighting 25%

The assignment consists of two parts: Part A of the assignment focuses on the financial instruments of two public institutions: BHP Billiton Ltd and Westpac Banking Corporation (Westpac). Part B of the assignment focuses on the fundamentals of capital budgeting. To successfully complete this project, you will use/apply not only theories studied in this TFIN501 but also other appropriate resources.

Part A: BHP Billiton Ltd. and WESTPAC Share Price Question 1

1. What is the current price of ordinary / common shares in BHP Billiton Ltd and Westpac? How has each evolved over from 2016 - 2019? Graph each series and discuss their evolution, noting the salient points. [10 marks]
2. Define Systematic and unsystematic risk, relative to BHP Billiton Ltd and Westpac. Identify one factor (e.g. item of news) that has affected the systematic risk of the company from 2016 - 2019 and reflected in the movement its share price. [15 marks]

Part B: Capital Budgeting

Evergreen Ltd requests you to evaluate two new capital budgeting proposals and provide your recommendations. You are required to submit a report by responding to the underlisted questions. In your report, state any assumptions made and clearly show all your steps in the calculations undertaken towards reaching your conclusions.

Instructions are as follows:

Provide an evaluation of two proposed projects: landfill and borehole. The initial outlays are $100,000 and $250, 000, respectively for the landfill and borehole. Evergreen Ltd has set the required rate of return for both projects to 12%. The expected after-tax cash flows from each project are as presented in the Table 1 below.

Table 1: Cash flows A

Inflow year 1 Inflow year 2 Inflow year 3 Inflow year 4 Inflow year 5 Inflow year 6

Landfill

$160,000 $160,000 $160,000 $160,000 160, 000 160, 000

Borehole

$300,000 $300,000 $300,000                       

Question 2

Briefly explain the net present value (NPV) and internal rate of return (IRR) criteria of evaluating of evaluating capital projects. Under what circumstance (s) would the NPV and IRR offer different recommendations, and which recommendation is preferred? Carefully explain (10 marks)

Question 3

1. Which project should Evergreen Ltd accept? Use the net present value (NPV) criterion to evaluate both projects. Explain in detail, including all calculations. Also, clearly state all your assumptions.(15 marks)
2. Determine the IRR for each project. According to the IRR, which project should be accepted? Explain in detail, including all calculations. (10 marks)
3. Would your conclusions in parts (a) and (b) change if the required rate of return increased to 14%? Explain in detail, including all calculations. [10 marks]

Table 2: Cash flows B

Inflow year 1 Inflow year 2 Inflow year 3 Inflow year 4 Inflow year 5 Inflow year 6

Question 4

Evergreen Ltd has revised its estimates of expected after-tax cash flows as shown in Table 2. The initial outlays are $800,000 for the landfill and $250, 000 for the borehole. Evergreen Ltd maintains the required rate of return at 12% for both projects.

1. Based on the net present value (NPV) criterion, which project should Evergreen Ltd accept? Explain in detail, including all calculations. Also, clearly state all your assumptions. (10 marks)
2. Based on the internal rate of return (IRR) criterion, which project should Evergreen Ltd accept? Explain in detail, including all calculations. Also, clearly state all your assumptions. (15 marks)

Question 5

Discuss the merits and limitations of the Payback period method evaluating capital projects. Despite its limitations, the payback period is widely used in industry. Explain why. [5 marks]

END OF ASSIGNMENT

Landfill

$450,000 $450,000 $450,000 $450,000 $450, 000 -$1 500, 000

Borehole

$300,000 $300,000 $300,000