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
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
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.
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
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