5105 LBSBW - The Leasing Company Pay Corporation Tax & Cashflow And Working Capital - Finance Assignment Help

Assignment Task -                 
 

Task

Your company have asked you to evaluate the following investment opportunity and to recommend an appropriate method of finance.

It will cost £3,000,000 to purchase the Property Plant and Equipment which has an Estimated Residual Value (Scrap Value) of £500,000 at the end of its 5 year life.

Additional annual revenues, over the 5 year life of the project are expected to be, £2,000,000 in the first year based on forecast sales of 1,000,000 units at £2 each, then increase in line with inflation and an anticipated 10% increase in volume each year. 

In terms of costs, the following additional annual costs are forecast:

    Materials €200,000 

    Labour £150,000    

Overheads (Fixed Costs) £250,000

Overheads (Variable Costs) £0.50 per unit

Government data suggests that Inflation over the period, together with volume increases will have the following impact:

• Selling prices will rise by 5% p.a.

• Material costs will rise by 10% p.a. and Labour costs by 8% p.a. 

• General inflation is expected to run at a rate of 3% p.a.

The bank has agreed to provide a loan of up to £1,500,000 at a Floating Rate of Base + 6% over 5 years. The remainder (or if you prefer, all or part of the finance) will need to be raised by issuing ordinary shares at £1 each. The latest Dividend was 4% but dividends are expected to grow in future years by 10%.p.a.

Your company are of course subject to UK Corporation Tax but the Property Plant & Equipment will be eligible for any appropriate capital allowances

The investment will also affect the companies Cashflow and Working Capital as Operational Expenditure (Material, Labour and Overheads) are all likely to occur before the inflow of sales income. The Working Capital Ratio is likely to fall below 2: 1 which some say is the ideal ratio.

Justifying your recommended Method of Financing the Project. 

• Evaluate the Project using appropriate Investment Appraisal Techniques 

• Compare your Project to the following alternative and recommend which project you would select if capital was rationed to £3,000,000 and the Board had a Risk Utility of √W, where W = Wealth:

Alternative Project:

Capital Investment: £2.5 M

Payback: 2 years

NPV: £1.5M

IRR: 32%

• If you could lease the Property Plant & Equipment calculate the maximum annual lease payment you would be prepared to pay to assume the Leasing Company pay Corporation Tax at 19% p.a. and evaluate Leasing versus Acquisition, recommending a course of action.

• What is the ideal Working Capital Ratio for companies from various sectors and explain how a Manufacturer and Retailer might improve their ratio

• Given the Board’s Risk Profile illustrate how Currency Options could reduce risk and outline the factors which will influence their price.

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