HC2091 :Capital Budgeting Decision Making Report - Accounting Assignment Help

Assignment Task:

Task:

This assignment task is a capital budgeting and project evaluation task with two parts:

Part 1: Capital Budgeting Decision Making

Part 2: Risk Analysis and Project Evaluation

ASSIGNMENT COVERPAGE Please use the provided template Specific Information for HC2091 Group Assignment T2 2021 Marking: (Please fill in this table and put it right before Introduction part in your assignment. It is important for marking, penalty is applied for missing information) Student name and ID Campus and Interactive Tutorial Group Number Which section(s) did each person work on Contribution (%

INTRODUCTION The introduction should briefly explain the purpose of the assignment (not more than 200 words)

CASE STUDY: Assume that you are working in the Finance Department of Wonderland Entertainment Ltd. Your Team is required by the company’s management to prepare and evaluation on the following potential projects: Page 4 of 10 HC2091 Group Assignment T2 2021 Project 1: building a new game centre. Your company currently has two alternative options that have different cash outlay and generate different revenue but same useful life of 4 years. The company currently faces the soft capital rationing. The table below shows the estimated data available to the company’s Management. Silver Stars Golden Moon Initial Investment $1,250,000 Initial Investment 2,050,000 Cash Flow in Cash flow in Year 1 450,000 Year 1 700,000 Year 2 500,000 Year 2 800,000 Year 3 550,000 Year 3 850,000 Year 4 650,000 Year 4 900,000 Project 2: Launching a new 3D virtual reality game product that is expected to sell for an average price of $120 per product. Launching this project will require the company to buy an equipment with the cost of $2,450,000 and residual value of $450,000 after five year. The company expects it can sell 175,000 unit per year at this price for a period of 5 years with this equipment. An additional working capital requirement for mass producing this game product is $185,000, which is expected to be retrieved at the end of the project. Other information is available below: To produce a unit of product, the company needs to spend a variable cost per unit of $70 Cash fixed costs per year is $150,000 Depreciation method: straight line Discount rate: 12% Tax Rate: 30% PART 1. CAPITAL BUDGETING DECISION MAKING (PROJECT 1) For Project 1, You are required to write a short report to the company’s Management: 1) To select a relevant method among five investment criteria of Net Present Value (NPV), Average Accounting Return (AAR), profitability Index (PI), Internal Rate of Return (IRR), Simple Payback Period, and Discounted Payback Period for each alternative option, given the market required rate of return for all projects of this type is 10% and the company’s benchmark of payback is maximum 3 years. Your recommendation must include your justification on why you choose the specific method based on its pros and cons compared to other methods and the financial condition of the company. (4 marks) 2) To perform the selected method and present the outcome of your project evaluation and recommend the option Silver Stars or Golden Moon should the company choose for the project. Your justification must include calculation steps and numerical outcomes. (6 marks) PART

2. RISK ANALYSIS AND PROJECT EVALUATION (PROJECT 2) For Project 2, your Finance Department conducted some economics forecast and estimated that in the coming time, the enduring covid-19 pandemic may cause uncertainty in the project’s values drivers which are unfavourable for the company. Therefore, the company’s management required Page 5 of 10 HC2091 Group Assignment T2 2021 your Team to conduct a risk analysis for this project to identify which value drivers are most NPV sensitive. Required: Perform an NPV sensitivity analysis with the following changes in the value drivers: Price per unit decreases by 15% Sales decrease by 15% Variable cost per unit increases by 15% Provide your results in (a) relevant tables. A conclusion on the risks of the project cash flows need to be drawn out.

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