MBA – ADVANCED CORPORATE FINANCE

MBA  – ADVANCED CORPORATE FINANCE

ASSIGNMENT BRIEF

 

 

This coursework assignment consists of one piece of work divided into two parts. You should ensure that you answer all the sections.

 

Beverages & Spirits Ltd (B&S Ltd) has been manufacturing beverages.  In recent years B&S Ltd has noted that its costs have risen substantially and it is considering closing one or more of its production plants.

 

Projected annual future costs and revenues for each plant are as shown in Table 1. The projected costs and revenues are per unit. In all, B&S Ltd expects to sell 100,000 units of each beverage each year.

 

Table 1

 

Costs are in USD$

 

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

 

Each factory lasts, in total, for five years and then becomes obsolete. The initial cost of  each factory  and  the  associated  research  and  development  costs  for  each beverage  were  as

shown  in  Table 2 Factory	Table  2.  These were paid    Initial Cost($)	two  years  ago  when production commenced.    Research and Development
Orange	10,000,000	Costs ($)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  payable immediately if production at the factory continues. These are shown in Table 3. The service fee is not payable if production ends at the factory immediately; instead each factory could be sold for the amounts detailed in Table 3. These amounts will be realised only if production ends immediately.

 

Table 3

 

Factory	Service Charge ($)	Resale Value ($)
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:

Depreciation is charged on a straight line basis over the life of the project.

Research and development expenditure is treated in the same way. Ignore taxation. The

estimated cost of capital for B&S Ltd is 13%. B&S Ltd has $180,000,000 invested in index

linked gilts which provide an annual return of 4%. B&S Ltd usually applies NPV and IRR

investment appraisal methods. It does not currently use payback.

 

(a) Discuss      whether      B&S Ltd      should      rationalise      and      end production  in  any  of  the  factories  producing  the beverages.  If so, suggest  which  factories  should  be  closed  and  explain  your answer fully. Explain what reservations you may have. (45 marks) (b) If B&S Ltd faced a shortage of cash [e.g. Bank Haircut] and was able to  meet service  charges  up  to  a  total  value  of  only  $10,000,000, which factories would B&S Ltd decide to keep open? (15 marks) (c) Discuss why the Internal Rate of Return method is used more often than NPV by financial directors. (40 marks)

Required:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overall assignment                                                                         (Total 100 marks)

(Maximum 4000 words)

 

 

 

 

 

 

Assignment Specifics:

 

 THIS IS AN INDIVIDUAL PIECE OF WORK.

 

 This assignme nt count s 100% t owards your final grade .

 

 Yourreport should be grounded in relevant theory – use the core and recommended reading.

 

Reference all sources appropriately, using the Harvard Referencing System.

 

 The word count of your re port is 4000 words-(/+10%).

 

The Assignment should be accomplished by 26/08/2016.

 

Late submissions will not be accepted.

 

 Use Tim e s Rom an pt 12, wit h 1½ or double spacing.

 

 Page s MUST be num be re d.

 

 He adings and sub-headings should be clear and visible.

 

 The t e xt should flow smoot hly, wit h e ach se citon leading naturally and logically to the next.

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