7251AFE - Applied Finance - Griffin's Case Study - Accounting And Finance Assignment Help

Assignment Task

INSTRUCTIONS TO STUDENTS:
The timed assignment is worth 40 marks in total and is composed of two (2) separate practical tasks, each worth 20 marks. For each task the marks are allocated as follows:
- Analysis 15 marks (correct calculation/workings and application of models/techniques)
- Report 3.5 marks (relevant arguments, key points identified and recommendations)
- Presentation 1.5 marks (proper organisation, professional writing and cell reference in all spreadsheet values) In the course of these performance tasks, you will prepare a business-style response to a hypothetical but realistic situation. Each performance task includes information detailing your role, a scenario, and a task to which you are required to respond.
You will use the information presented in each case in carrying out the task. While your personal values and experiences are important, you should base your response on the evidence provided in these tasks along with your knowledge gained in the course. It is important that you provide clear evidence of your ability to apply your knowledge of finance as learned in the course to the task.
Submit your response in an Excel file which should contain four (4) worksheets named as: Task 1, Report 1, Task 2, and Report 2. The Task worksheets should contain the calculations and workings, while the Report worksheets should contain a brief one page report where you present the findings, considerations, recommendations, conclusions or any other issues relevant to each task. For presentation purposes in the Report worksheets, either type in cells directly and then remove gridlines, or insert pdf or word pages as pictures.
By submitting this take-home examination for assessment, students acknowledge Sect. 6.1 Assessment Related Policies and Guidelines, University Policies & Guidelines in the Course Profile in relation to academic misconduct.

Task #1: Griffin

Role and Context
You are a financial analyst in the capital projects department of Griffin, a speciality chemicals producer of fire-control chemicals, additives, and pesticides based in Queensland. Currently, Griffin is small in scale but embarking on a rapid expansion and modernization program. It is also expanding its range of products into dyes, rubber compounds, and water treatment chemicals. Along with the projects considered here, Griffin is also currently undertaking evaluation of projects expanding its existing facilities in SE Queensland, the acquisition of another chemical producer in Victoria, a joint venture with a US company producing fuel additives, and various production and warehouse upgrades in a few smaller plants in NSW and South Australia. While Griffin has a large and expanding capital budget, it is currently considering which of two possible projects it should invest in, both of which will be used to manufacture furfural (an organic compound derived from agricultural by-products) and furfural-based derivatives to make resins, urethanes, and refining solvents over a 10-year operating period..

Scenario

The first project, the Djakarta Plant, is a proposed new plant in Indonesia, about 40 km outside the capital. Griffin has been considering this expansion for many years and believes that the combination of low wages, looser environmental protection, and proximity to its emerging markets in SE Asia will makes this new plant an attractive addition to its existing facilities. Specifically, now, in 2019 the Djakarta Plant will require the purchase of land for $3.55 million, with development and construction building costs of $15 million, and plant and equipment of $4 million. Griffin will also need to spend on working capital each year. The change in net working capital is an increase of $100,000 plus 4% of sales every year during the life of the project(the exception being the return of all previous working capital in the last year of the project). Sales are estimated to be $45.6 million in 2020, the first year of production, increasing by 11% per annum after that. The cost of goods sold is 60% of sales. Fixed costs will be $12 million in 2020, increasing by 4% per year. Both buildings and plant/equipment will be depreciated straight line to zero over the 10-year project life. The buildings will have a salvage value of 25% of cost and the plant and equipment will have no salvage value. At the end of the project, Griffin will rehabilitate the site at a cost of $7 million and sell the land for light industrial development for $15.6 million. The company tax rate in Indonesia is normally 20%, but the new government is offering an incentive for the first three years of operation for major manufacturing projects where the tax rate will only be 18%, before reverting to the normal rate.

The second project, the Gladstone Plant, is a modification of an existing plant Griffin already owns in the city of the same name in north Queensland. The Gladstone Plant has been idle for many years, but with renovation would be well suited to furfural production. If not used for the proposed project, Griffin will lease out the existing plant for $80,000 (before tax) per year. The estimated development and construction building costs will be $18 million this year alongside plant and equipment investment of $6 million. Griffin will again need to invest in working capital, thus the change in net working capital will be an increase of $80,000 plus 4% of sales every year when production commences in 2020 (the exception being the return of all the previous working capital in the last year of the project). Sales will be $47 million in 2020, increasing by 8% per annum thereafter. Given the relative geographic isolation of the plant, the stricter environmental controls and the proximity to the Great Barrier Reef, the cost of goods sold will be 70% of sales. Fixed costs will be $5 million in 2020, increasing by 4% per year. Both buildings and plant/equipment will again be depreciated straight line to zero over the 10-year project life. The buildings will have a salvage value of 25% of cost and the plant and equipment will have no salvage value. At the end of the project, the Gladstone Plant will again revert to being idle awaiting potential future developments at no cost. The company tax rate in Australia is 30%.

Task
Provide a report to Griffin’s CFO, Ms. Kirsten Robertson, recommending in which of these two mutual exclusive projects Griffin should invest, if any. Assume Griffin has a cost of capital of 11% for domestic projects and 17% for international projects.

Task #2: Gold Coast Water Company

Role and Context
You are a newly hired financial analyst with Gold Coast Water Company (GCWC), a company operating in Queensland, which specialises in bottling purified water sourced from Tambourine Mountains springs. GCWC is considering adding to its product mix a ‘healthy’ bottled water geared towards children, aimed at improving both its business focus and the return to shareholders. 

Scenario
GCWC currently has 40,000,000 ordinary shares outstanding that trade at a price of $35 per share. GCWC also has 400,000 bonds outstanding that currently trade at $983.38 each. The company’s bonds have 20 year to maturity, a $1,000 par value and a 10% coupon rate that pays interest semi-annually. GCWC has no preferred equity outstanding and has an equity beta of 2.21. The risk-free rate is 2.5% and the market is expected to return 10.52%. GCWC has a tax rate of 34% The initial outlay for the new project is expected to be $4,000,000, which will be depreciated over the next 3 years using the straight line method to a zero salvage value, and sales are expected to be 1,550,000 units per year at a price of $2.05 per unit. Variable costs are estimated to be $0.62 per unit and fixed costs are estimated at $75,000 per year. The above estimations are valid for 3 years of project life after which a terminal value of $580,000 in year 3 is expected to cover all cash flows to be earned in the future. For the purpose of this project, working capital effects are ignored.

GCWC’s CEO, Ben Waters, has asked the finance department if they consider such project to be an acceptable investment. The CFO, Mrs. Alexandra Robinson, intends to evaluate the project based on the net present value approach. She agrees with Mr. Waters on the major assumptions that will affect these cash flows, but they disagree on the appropriate discount rate. Mr. Waters believes that they should use the company’s weighted average cost of capital (WACC), however, the CFO disagrees, arguing that the bottled water targeted at children has different risk characteristics from the company’s current products. She argues that the company’s WACC is inappropriate as a discount rate and they should instead use the ‘pure play’ approach and estimate a cost of capital based on companies that sell similar type of products. To do this, Mrs. Robinson obtains some data for several comparable companies as follows:

Task
The CEO and CFO have decided to rely on your newfound expertise as to provide a recommendation on why the company’s WACC should not be used, and if not, what is the appropriate discount rate to be used in the appraisal of the new project. Concerned about the forecasting risk of this project, they also ask that you perform a risk evaluation in the form of:
- Sensitivity analysis for sales price, variable costs, fixed costs and unit sales at ±10%, ±20%, and ±30% from the base case, showing on a graph which variables are most sensitive;
- Scenario analysis on the following two scenarios:
a) Worst Case: selling 1,250,000 units at a price of $1.75 and variable cost of $0.68 per unit;
b) Best Case: selling 1,750,000 units at a price of $2.25 and variable costs of $0.49 per unit.
Based on the above analysis provide a recommendation whether GCWC should invest in this project.

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