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MBA – ADVANCED CORPORATE FINANCE

ASSIGNMENT BRIEF

Thiscourseworkassignmentconsistsofonepieceofworkdividedintotwoparts. You should ensurethatyou answerallthesections.

Beverages&SpiritsLtd (B&S Ltd)hasbeenmanufacturing beverages. In recentyearsB&SLtd has notedthatitscostshaverisensubstantiallyanditisconsidering closingoneormore ofits production plants.

ProjectedannualfuturecostsandrevenuesforeachplantareasshowninTable1.Theprojected costsandrevenuesareperunit.Inall,B&S Ltdexpectstosell100,000unitsof each beverage eachyear.

Table1

CostsareinUSD$

Factory
Revenues
Materials
LabourCosts
Overheads
Orange
60
10
5
25
Apple
180
130
25
45
Peach
100
20
60
20
Pear
350
85
225
150

Eachfactorylasts,intotal,forfiveyearsandthenbecomesobsolete.Theinitialcostof each factory and the associated research and development costs for each beverage were as
shown in

Table2
Factory
Table 2. Thesewerepaid

InitialCost($)
two years ago when productioncommenced.

ResearchandDevelopment

Orange

10,000,000
Costs($)
2,000,000
Apple
15,000,000
5,000,000
Peach
20,000,000
1,000,000
Pear
30,000,000
2,000,000

B&S Ltd must also pay a service charge on the factory, which is payableimmediatelyif productionatthefactorycontinues.TheseareshowninTable3.Theservicefeeisnotpayableif productionendsatthefactoryimmediately;insteadeach factorycouldbesoldfortheamounts detailedinTable3.Theseamountswillberealised onlyif production endsimmediately.

Table3

Factory
ServiceCharge($)
ResaleValue($)
Orange
10,000,000
4,000,000
Apple
2,000,000
8,000,000
Peach
3,000,000
3,000,000
Pear
6,000,000
7,000,000

Note:
Depreciationischargedonastraightlinebasisoverthelifeoftheproject.
Researchanddevelopmentexpenditureistreatedinthesameway.Ignoretaxation.The
estimatedcostofcapitalforB&SLtdis13%.B&SLtd has$180,000,000investedinindex
linkedgiltswhichprovideanannual returnof4%.B&S LtdusuallyappliesNPVandIRR
investmentappraisalmethods. Itdoesnotcurrently usepayback.

Required:

(a)

Discuss whether B&SLtd should rationalise and end production in any of the factories producing thebeverages. Ifso, suggest which factories should be closed and explain youranswer fully. Explain whatreservationsyoumay have.

(45marks)
(b)
IfB&SLtdfacedashortageofcash[e.g.BankHaircut]andwasable to meetservice charges up to a total value of only $10,000,000, which factorieswould B&SLtd decidetokeepopen?

(15marks)
(c)
DiscusswhytheInternalRateofReturnmethodisusedmoreoften than NPV byfinancial directors.

(40marks)



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