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Case Study in Finance

1. Calculate the incremental operating net cash flow associated with each alternative (this should be
prepared in an excel spreadsheet, with completed work copied across to a word document)
2. Determine the NPV, IRR and PI for each choice.
Based solely on your comparison of the relevant cash flows, which alternative is better? Why?
3. Draw a NPV profile for each project on the same set of axes and discuss any conflict in rankings that
may exist between NPV and IRR. Explain any observed conflict in terms of the relative differences in
the magnitude and timing of each project’s cash flow.
4. After reviewing the data provided, you realise that cost figures have not been adjusted for inflation which
is expected to average 3.5% p.a. over the long term. Specifically, the advertising costs are expected to
increase at a rate of 4% p.a. by the end of the first year. Both operating and maintenance costs are
expected to increase at a rate of 3% p.a. from the initial cost estimates. This is because these items are
largely fixed under contract obligation. The impact of inflation also affects overheads, salaries and all
other expense/costs at a rate of 3.5% p.a. by the end of the first year
5. Using the base-case scenario for Alternative 1 and 2 ,determine:
a. How low sales revenues will have to fall to,
b. How high operating and maintenance cost will have to rise to
before the project becomes unfeasible to the company. Discuss how this impacts above
6. Without any calculations, the company would also like you to start a preliminary discussion on whether
the new generation craft machinery should be leased or purchased outright. Your discussion should
consider the advantages and disadvantages of adopting an operating or finance lease for the machine.
Address how a lease arrangement might change your analyses.
7. Investigate recently received information for the Lifestyle Furniture company, which are given below
Source of capital Book value Market value AT costs
Long-term debt $4,000,000 $3,840,000 6%
Preference share capital $40,000 $60,000 13%
Ordinary share equity $1,060,000 $3,000,000 17%
a. Calculate the WACC using book value weights
b. Calculate the WACC using market value weights
c. Compare the answer obtained in parts a and b. Explain the differences.


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