FIN20014_Kaplan_Financial Management: Individual Assignment

Study Period 2, 2015

Faculty of Business and Law

Higher Education Division
FIN20014 (Kaplan) Financial Management
Study Period 2 2015
The objective of this assignment is to encourage the students to use excel spreadsheets to aid
in problem solving. Students are asked to solve a capital budgeting problem using an excel
spreadsheet.
Weighting:

20% of total assessment

Due Date:

Sunday 2nd August at 11:55 pm [SG Time]. Submit your assignment online
through TURNITIN via Blackboard.

Late Submissions:

You must contact unit convenor Miraj Ahmmod (sahmmod@swin.edu.au)

directly and make alternative arrangements should you not be able to
submit your assignment in due time. Assignments will not be accepted
after 11.55 pm (SG Time] on Sunday 2nd August unless an arrangement has
been made directly with the convenor.

Format:

The assignment is a problem solving exercise using an excel spreadsheet

with additional discussion on findings, forecast errors and risk.

Documents:

Students should submit the following documents ALL MERGED in ONE

FILE (either doc or pdf) only
an assignment COVER sheet
a copy of their formal REPORT
a copy of their excel spreadsheet with VALUES
a copy of their excel spreadsheet with EXCEL FORMULAS

Online Submission:

Link and details will be available on BB under Assessment folder.

Details of Assignment
The General Manager (GM) of RUNWELL Corporation needs a detail analysis on an exciting
proposal to introduce a new line of vehicle parts for environmental protection against carbon
emission. Starting the production line requires renovating one existing section of the factory. It
will be a B2B contract based project that will continue for eight years. Its projected that
technological up-gradation of car manufacturing process will make this production line obsolete
in ten years time.
In winning this contract through a bidding process, the company has spent $41,000. Required
renovation can be conducted immediately at a cost of $130,000 that includes installation cost of
new plant and equipment (P&E). The contract requires annual quality assurance inspection that
will cost $36,000 per annum. The procurement of HR will be one-off cost at the beginning and
estimated to be $48,000. For successful start and continuation of the project, management also
needs to finalise issues with employee union leaders for utilizing existing workers with training.

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FIN20014_Kaplan_Financial Management: Individual Assignment

Study Period 2, 2015

A local distributor of a Japanese company can immediately supply all required parts and
accessories of the new P&E for a total charge of $1,400,000 including import duty of $210,000.
In addition, transportation cost of $40,000 and installation costs of $70,000 are to be incurred
for new P&E. These P&E would be depreciated over its useful life of ten years using a tax
allowable straight line rate of 10%. However, the company can sell the machine at the end of the
contract for $250,000 after incurring an additional cost of $24,000. The company has decided to
capitalise total renovation costs to new P&E.
RUNWELL will be in contract to supply 48,000 boxes of the parts per year and that will require
RUNWELL to operate at 80% of its capacity when variable operating cost will be 50% of sales.
Selling price per box will be $30. Annual fixed operating cost, excluding depreciation, will be
$160,000. It is estimated that the production line will operate at full capacity during the last four
years due to increasing demand. Variable operating cost at full capacity would be 45% of sales.
Existing section of the factory, where the new P&E will be installed, is in use by a subcontractor
who pays monthly rent of $2,500. Therefore, RUNWELL has to forgo the rent income once the
new production line commences its operation.
In addition to initial employee training cost of $26,000, there will be additional training expense
of $18,000 in the first year. It is also estimated that the new production line will require an
initial increased investment of $51,000 in stock and $23,000 in debtors that are offset by an
increase in creditors of $25,000.
The firm has a 14% weighted average cost of capital (WACC) and is subject to a 30% tax rate.
The required discounted payback period is 5 years.
The GM hesitates to take the final decision because of unexpected growth in car manufacturing
technology. RUNWELL has an offer to sell the contract to another compliant company for
$200,000. The GM also asks whether or not the discount rate should be increased to allow for
the risk of the above contract or is the WACC appropriate?

Required
Using Excel Spreadsheet prepare a full analysis to be presented to the GM of RUNWELL
Corporation evaluating whether the existing product line should be renovated for the new
product line. Your analysis should include the following
Table of cash flows
Use of excel formulae where appropriate
A written report (1200 words, +/- 10%) outlining your recommendation as to whether
RUNWELL Corporation should proceed. Justify your recommendation and your analysis
of risk. Also describe the pros and cons of new product line.
Marks will be awarded for:
Set out of spreadsheet
i. Ease of reading spreadsheet
ii. Use of excel formulae in organised spreadsheet
iii. Correct application of theoretical model
Overall presentation of answer including the written report.
* Carefully read the following Marking Rubric on page-3 for required components and
presentation of formal report.

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FIN20014_Kaplan_Financial Management: Individual Assignment

Study Period 2, 2015

Marking Rubric

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