FIN 32Advanced Corporate Finance

Spring Session 2016

Group Assignment Instructions
You are a senior recruiter at Best People, a recruitment agency. Tasman Pulp Mill Co.
(TPM), a long-time client of Best People, is a Launceston-headquartered & ASX-listed
company that employs more than 1200 people across its diversified business units in
Tasmania, where the overall unemployment rate is above 7.5%. Mr. David Smith, the current
chief financial officer (CFO) of TPM, has just announced that he will retire in 6 months after
25 years at TPM. The chair of the recruitment committee of the board of directors at TPM
asks you to help find the next CFO who will be able to assist the chief executive officer
(CEO) to continue the success and growth that TPM has seen over the last two decades or so.
You indicate to the committee chair that, because TPM continues to expand its operations
via either acquiring other businesses or upgrading current facilities, it is critically important
the incoming CFO has thorough understanding of project analysis and capital budgeting. You
also suggest that the best way to test the candidates knowledge and practical skills is to ask
the candidates to analyze a simulated case in addition to the usual formal interview.
Part I (10 marks): The committee chair agrees with you and asks you to come up with a
mock case. The information listed below will be given to the candidates.
(1) TPM has an after tax cost of capital of 12%; it will pay 9% on any new bank
borrowing; the current tax rate is 30%.
(2) A new manufacturing technology has just become available. Adopting this new
technology requires TPM to upgrade its manufacturing equipment. Compared to the existing
technology, the new technology is faster and requires fewer workers but at the same time is
less environmentally friendly.
(3) The current pulp mill equipment has an annual output of 500,000 air dried tonnes
(ADt) of pulp which currently sells at $124 per tonne. In contrast, the new equipment will
have an annual output of 600,000 ADt of pulp.
(4) The current equipment was purchased three years ago for $49,000,000. It has a book
value of $28,000,000 and another four years of life remaining with no salvage value. It can be
sold on the secondary market today for $11,000,000. The new equipment costs $75,000,000
(will be funded by bank loans) and is expected to last five years with an estimated salvage

value of $15,000,000. The new equipment will immediately reduce net working capital
(NWC) by $1,200,000.
(5) The current equipment requires annual fixed cash costs (including overhead and
operating) of $4,150,000, while the new equipment requires $3,780,000.
(6) Manufacturing pulp using the current equipment incurs the following costs (per tonne)
in addition to the costs stated in (5): labour $33.5, material $36.5, variable overhead $14.25.
The corresponding figures for the new equipment are $17.45, $30.20 and $12.55,
respectively.
All candidates are required to answer the following questions. The committee chair asks
you to prepare the correct solutions so the answers by the candidates can be checked.
Assume there is no inflation during the whole period and both machine can be replaced at
the end of their respective project life.
(a) Should TPM upgrade to the new technology or continue to operate using its current
equipment?
(b) Will your answer be different if neither project can be replaced at the end of their
respective life?
(c) Conduct risk evaluations (using the sensitivity analysis) of adopting the new
technology by considering the following factors: output using the new technology may be
overestimated; the reduction in NWC may be overestimated; due to continuous development
in the industry, the equipment may worth less than $15,000,000 in five years; the labour cost
per tonne may be underestimated.
Note: Your answers to this part will be different from those of other groups depending on
what values you choose. Each group only needs to choose one particular value for each of
these variables.
(d) What types of factors (financial and/or non-financial) TPM must also consider when
evaluating the new technology.
Part II (3 marks): The committee chair also asks you to prepare a list of questions which
will be used in the formal interview to test the candidates theoretical understanding of
project analysis and capital budgeting. The Chair indicates that the number of questions
should be no fewer than three but no more than five. The Chair further indicates that the
majority on the interview panel have no or little background in project analysis and capital
budgeting; therefore they rely on the answers prepared by you to conduct the interview and
select the most suitable candidate for the position of CFO.

Requirements:
For Part I, a full report that consists of the calculation results and the associated analysis
is required; a separate Excel spreadsheet showing the necessary calculations and risk analysis
is required.
In terms of style and format, the full assignment should be no more than 15 pages
excluding references and appendices. You are required to use 12 point font size, 1.5 linesspacing with standard margins. The font size of the Excel spreadsheet can be adjusted to fit
the page. The spreadsheets CANNOT be placed in the appendices. Up to 2 marks will be
deducted if the style and format requirements are not met.
Submission:
(1) Both a hard copy and a soft copy need to be submitted. Partial submission (i.e.,
submitting only a hard copy or a soft copy) will NOT be marked.
(2) Only one full submission is required for each group.
(3) Download and sign the assignment coversheet (each group member must sign the
declaration on the coversheet). The coversheet is available on the subject Moodle site.
(4) The soft copy needs to be submitted via Moodle site. A Turnitin submission link will
be provided on Moodle in due course. Submission by direct email to the subject
coordinator will NOT be accepted and will NOT be marked.
(5) Penalty applies to late submissions. 20% of your mark will be deducted for each
day late. For example, you submit the assignment one day after the due date and your mark
before penalty is 12 (out of 15). Then your final mark for the assignment will be 9.6 (or 9.5
after rounding).
Any Questions?
If you have any enquiries regarding the group assignment, feel free to raise your
questions during the tutorials or consultation time. You are also encouraged to publish your
questions on the Assignment Discussion Forum (A specific link will be provided) on the
subject Moodle site. However, you are not allowed to discuss your solutions with other
groups.