GMBA6006: Panjang Ltd - Manufacturing Company Case Study - Accounting and Finance Assignment Help

Assignment Task:

Panjang Ltd is a manufacturing company that specialises in producing safety apparatus for the construction industry. The company manufactures four main products: hard hats, safety glasses, noise-reducing ear plugs and face masks. New technology was recently developed that would enable the firm to produce a larger volume of safety glasses in any given year. Management have requested you to investigate whether they should continue to invest in the current technology that is used to develop these safety glasses or consider upgrading to the modern technology.

The company manufactures all its products at the same rented factory on the outskirts of Newcastle. The current rent for this facility is $500,000 per annum. However, as the Glasses3000 takes up significantly more floor space than the Glasses-O-Matic, Panjang Ltd would need a larger factory if they decided to invest in this new machine. The landlord also owns an adjoining factory and has offered Panjang Ltd to rent both premises for a combined cost of $750,000 per annum. The CEO of Panjang Ltd earns an annual salary of $650,000.

Regardless of which technology is used to produce safety glasses, they are expected to have a sale price of $13 per unit. All sales made by Panjang Ltd are cash only.Both machines are depreciated straight-line across their useful life and neither machine is expected to have a salvage value at the end of its life. Panjang Ltd has an effective tax rate of 25%. You have estimated that the required rate of return on both of these projects is 8% p.a.

Question 1 (16 marks)
Calculate the one-life NPV for the Glasses-O-Matic.

Question 2 (20 marks)
Calculate the one-life NPV for Glasses3000.

Question 3 (4 marks)
Based on your one-life NPV calculations identify which, if any, of the machines you would recommend that Panjang Ltd purchase:
a. If the projects are independent.
b. If the projects are mutually exclusive.

Question 4 (12 marks)
Calculate the internal rate of return (IRR) for both machines and identify which machine you would invest in based on this approach assuming the two projects are mutually exclusive. Discuss why your investment decision is either the same or different when using the IRR compared with the NPV.

Question 5 (12 marks)
Calculate the payback period for both machines and identify which machine you would invest in based on this approach. Discuss the weaknesses with using the payback period to evaluate the two machines.

Question 6 (8 marks)
Assume that the two machines are recurring and mutually exclusive. The investment cost and cash flows for all future life cycles is expected to remain constant.Compare the two projects using the constant chain of replacement approach and lowest common life approaches and briefly discuss your results.

Question 7 (6 marks)
The management team at Panjang Ltd is worried that the actualsale price might differ from the expected price. The management believe the best-case scenario is a sale price of $11 per unit and the worst-case scenario is a price of $8 per unit. Calculate how sensitive the one-life NPV of both projects is to these alternative estimates of the sale price and briefly discuss your results.

Question 8 (4 marks)
An analyst working for Panjang Ltd has proposed that as the firm is only financed with equity and all of the firm’s projects have the same level of risk, the cost of equity capital should be used as the discount rate in NPV analysis. The analyst has estimated that the returns on Panjang Ltd’s stocks have a standard deviation of 30% per annum while the market portfolio returns have an expected standard deviation of 20% p.a. The covariance between the returns of Panjang Ltd stocks and the market is 5%.The risk-free rate is 4% p.a. and the expected return on the equity market portfolio is 10%. Use the CAPM to calculate Panjang Ltd’s cost of equity capital.

Question 9 (8 marks)
Assuming the machines are recurring projects, calculate the equivalent annual value of both the Glasses-O-Matic and the Glasses3000 machines using the equity cost of capital as the discount rate for cash flows.

Question 10 (10 marks)
Discuss the problems with using the CAPM to estimate the equity cost of capital.

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