Capital Budgeting and Project Evaluation

This solved assignment focuses on capital budgeting techniques and project evaluation. It presents a case study involving three mutually exclusive projects (X, Y, and Z) with detailed financial information such as initial costs, economic lives, and expected additional profits. Students are required to calculate the Net Present Value (NPV) for each project using a 20% rate of return. The analysis concludes by evaluating the feasibility of each project based on its NPV.

Running head: FNSACC 601
FNSACC 601
Name of the Student
Name of the University
Author Note

1ASSESSMENT 2
Assessment 1
Q1. What is an economic problem?
The economic problem – even called the central or the basic economic problem – states that an
economy's limited assets are inadequate to fulfill every human needs and wants. It expects that
human needs are boundless, however the way to fulfill human needs are scarce.
Q2. What is WACC and Leverage ratio?
The ratio among the debt and equity in the cost of capital computation should be similar as the
ratio between a company's overall debt finances and its total equity financing. This is also
known as the weighted average cost of capital, or WACC.
The organizations depend on a blend of owners' equity and debt to finance their operations. A
leverage ratio is any one of the numerous financial techniques that look at how much capital
arrives in the form of debt, or assesses the capability of a firm to meet their financial obligations.
Q3. Explain capital structure policy and Why does Capital structure matter?
Capital structure, the mixture of a firm's debt and equity, is important because it costs company
money to borrow. Capital structure also matters because of the different tax implications of debt
vs. equity and the impact of corporate taxes on a firm's profitability. Firms must be prudent in
their borrowing activities to avoid excessive risk and the possibility of financial distress or even
bankruptcy.
The capital structure policy comprises of the capital structure, financial leverage, Modigliani and
Miller's Capital Structure Theories, Bankruptcy Costs and Optimal Capital Structure, Extended
Pie Model, Observed Capital Structures and Long-Term Financing.

2ASSESSMENT 2
The capital structure of a firm does matter as it helps in the development of an effective
framework within which the company would operate their financial activities and regulate the
process of investing and gaining their capital so that effective operational activities can be
attained.
Q4. What is The Capital Asset Pricing Model (CAPM)? Explain with Equation
The capital asset pricing model (CAPM) is a model that describes the relationship between
systematic risk and expected return for assets, particularly stocks. CAPM is widely used
throughout finance for the pricing of risky securities, generating expected returns for assets given
the risk of those assets and calculating costs of capital. The equation is as follows:
Q5. “Prudential Standard APS 110” download from government website.
Summarize the whole concept (minimum 600 words) and make short class lecture (10 minutes).
YOU MUST EXPLAIN FOLLOWING POINT
• Responsibility for capital management
• Measurement of capital adequacy
• Minimum capital adequacy requirement
• Risk-based capital adequacy framework

3ASSESSMENT 2
The Prudential Standard APS 110 comprises of the various concepts that are useful for the
development of the capital management of an organization. This standard is under the section
11AF of the Banking Act 1959. This standard is applicable to all the permitted deposit taking
organizations with respect to the Banking Act that is subject to paragraph 3.
It is seen that with respect to the responsibility capital management, it is seen that capital has
been looked down upon as the cornerstone of the financial strength of an ADI. It aids the
operations of ADI by giving out a cushion to absorb the losses that have not been predicted from
their actions and in the event of the issues that enables the ADI to sustain to operate in a viable
and sound manner while the issues are resolved and addressed.
The capital management requires to be an integral part of the risk management of ADI by
aligning their appetite of risk and the risk profile with its ability to gain in losses.
The board of directors of ADI has to the role to make sure that ADI maintains a degree and
quality of the capital commensurate with the amount, type and focus of risks to which ADI has
been exposed from their operations. In doing so, the board needs to have knowledge about the
changes that can be possible in the risk profile of ADI and the capital holdings.
The member of an ADI can be exposed to risks, inclusive of the contagion and reputational risk
through their relation with the other members of the group. The issues that arise in the group
members consist of the operational and financial position of ADI.
The measurement of capital adequacy can be found by explaining that APRA utilizes a tiered
method to the computation of an ADI’s adequacy of capital. It evaluates the financial strength of
ADI at three levels in order to make sure that the ADI is capitalized adequately both on a group
or an individual basis. The levels are:

4ASSESSMENT 2
Level 1-either:
 The ADI itself or
 The Extended Licensed Entity
Level 2- either
 If the ADI is not a subordinate of a permitted NOHC and the ADI has subordinates in
addition to the ones that have been included in their ELE, the ADI consolidation of the
ADI and their subordinate entities other than the subsidiaries that have been non-
consolidated or
 If ADI is a subordinate of a permitted NOHC, the consolidation of the imnmediate parent
NOHC of the ADI of all the immediate parent of the subsidiary entities of NOHC, other
than the non-consolidated subsidiaries, unless APRA ascertains a variant Level 2
composition for an association of comp[anise out of which ADI is a member
Level 3- the conglomerate group at the widest level
In accordance to the minimum capital adequacy requirements it is seen that APRA would
ascertain the Prudential Capital Requirements for an ADI. The PCRs explained as a
percentage of the overall risk-weighted assets, will be set by the reference to the Common
Equity Tier 1 Capital, Tier 1 Capital and Overall Capoital. The PCRs may be ascertained at
Level 1, level 2 or both. The minimum PCRs that ADI needs to maintain at all times are:
 A tier 1 Capital ratio of 6%
 A Common Equity Tier 1 Capital ratrio of 4.5%
 Total capital. ratio of 8%.

5ASSESSMENT 2
The ADI requires to maintain a risk based capital ratios more than their PCRs at every time. The
risk based regulatory capital ratios are to be computed with respect to Attachment A.
The risk based capital adequacy ratio is consistent with Basel II and III as capital adequacy is
reliant on the risk based capital adequacy framework that has been set out in the Basel
Committee on the Banking Supervision’s Publications.
Q6. The three main decisions that companies face are given bellow.
 How companies make decision?
(1) The Investment Decision
The investment decisions are undertaken by assessing the market along with the current financial
statement.
(2) The Finance Decisions
The financial decisions are undertaken by looking at the managerial finance and the decisions
associated with investment. The financial decisions are undertaken by looking at the demanders
and the suppliers of the fund, assessing the risks, the rates of interest and understanding the
financial framework of the firm. The financial decisions are undertaken by looking at the time
value of money and the risk and return trade-off.
(3). Dividend Decisions
The decisions with respect to the dividend is undertaken by gaining knowledge about the level of
profit the firm has attained in a year and the level of additional capital that is essential for the
development and expansion of the business of an organization.

6ASSESSMENT 2
Q7. Research for each of the below products, identify which market structure (monopoly,
oligopoly, monopoly competition or perfect competition) each of the markets most closely
resembles, and why. The first has been done for you.
Product Example of Market
Practice
Market Structure Why?
TV Samsung Oligopoly  Few participants
 Price markers
 Differentiated products
 High barriers to entry
(significant R&D and
production costs)
Shares The ASX Monopoly One producer and no
reasonable substitute
Accounting
service
KPMG Perfect
Competition
Many buyers and sellers
Wool Independent farmers Monopolistic
Competition
Element of monopoly and
perfect competition
Cars Holder Oligopoly  Few participants
 Price markers
 Differentiated products
 High barriers to entry

7ASSESSMENT 2
Cinemas Event Cinemas Oligopoly  Few participants
 Price markers
 Differentiated products
 High barriers to entry
Q8. What is financial markets and what type of products and services they provide?
A financial market is a market in which individuals trade their financial bonds and securities,
products, and value at decreased transaction costs and at prices that replicate the supply and
demand. The securities are inclusive of the stocks and bonds, and the products include precious
metals or agricultural products.
Q9. Explain the key features of microeconomic principles and describe with example
Microeconomic Reform in Australia?
The key features of microeconomic principles are:
 It is individualistic kind of economics.
 It is related to the behavior of the individual economic entities like the firms, households
and markets.
 It assumes the existence of full employment in the overall economy.
 It assesses the economic phenomena under the assumption of ceteris paribus and
therefore is a process of partial equilibrium evaluation.
 It is applicable under the market economy where price acts a core function.

8ASSESSMENT 2
 It is even known that value or price theory.
 Its aim has been to assess the method by which limited resources are assigned among the
alternative uses.
 Its core aspects is the level of competition in the individual market.
 Its fundamental variables are relative prices, supply, output, individual demand of the
singular companies and so on.
There are various microeconomic reforms that are seen in Australia and this can be explained
with the help of examples that have been given below:
 Decrease in protectionism
 Deregulation
 IR reform
 National Competition Policy
 Rise in spending on capital of tertiary education
Q10. Explain key features of common economic theories that relate to the financial services
industry. Like:
(a)Supply Side Economics.
Supply side economics is a theory that is macroeconomic in nature that debates with the fact that
economic growth can be most efficiently established by reducing the level of taxes and lowering
the regulations. With respect to supply side economic, the consumers will then gain advantage
from a greater supply of services and goods at reduced prices and the level of employment will
rise.

9ASSESSMENT 2
(b) The Global Financial Crisis
The global financial crisis is even known to be the worst financial crisis after the Great
Depression and this crisis took place due to the crisis in the mortgage market in the market of
USA and later turned into a fully developed international banking crisis with the down fall of the
investment banks globally. This crisis later was followed by economic turndown which was
known as the Great Recession. There was a massive fall in the global economy and this led to
rise in unemployment and fall in the global GDP.
(c) Value Theory
The term value theory can be used in three various ways in the philosophy. Value theory is a
catchy label that is used for the cover all the branches of the social moral and political
philosophy and the areas that would be used for the areas that are associated with the evaluative
aspect. In its shortest sense, value theory is utilized for a generally narrow area of the normative
ethical theory specifically but not exclusively of concern to the consequentialists.
Q11. Describe key features of relevant legislation, statutory requirements and industry codes of
practice for financial service industry.
The key features of relevant legislation, statutory requirements and industry codes of practice for
financial service industry are:
Legislation regulations
Source documents for regulations, legislations and policies that are precise to the provision of
financial services and products that are accessed and sourced. The key legal principles and the
organizational applications associating to the financial product and services provisions are

10ASSESSMENT 2
communicated and assessed. The organizational requirements of these documents and their
impact on the working practices are recognized with respect to the procedural needs. The
procedural requirements associating to the operational components of regulations and laws and
the practice codes are executed in line with the organizational policy. The role authorities and the
limitations are recognized in the position profiles are complied with. The mechanism is created
to make sure that currency of regulatory literature is maintained.
Statutory records
It is seen that precise records are maintained and the copies of any precise agreements are
maintained in the file. The evidence with respect to present authorization, licenses and training
are maintained with respect to the legal, organizational and regulatory needs.
Industry Codes
The precise industry codes are accessed, sourced and applied to their own work with respect to
the organizational needs. The essential principles and accountabilities are translated with respect
to the industry codes of practice with own translation and application of the industry codes of the
practices confirmed and clarified as needed with the precise individuals. The effect of the codes
of practices on the working mechanism is incorporated and understood.
Q12. What do you understand by the economic and political climate change? Describe the
economic and political climate change relating to the financial services industry.
The political economy of climate change is a process that is applicable to the political economy
that looks for political and collective processes to examine the critical issues that surrounds the
decision making process on the change in climate.

11ASSESSMENT 2
It is seen that argumentative transformations in economic scenarios and in the political climate
could have a material impact on the business, financial scenario and outcomes of the liquidity
and activities. The business environment is attracted by various uncertainties that are political in
nature and this would sustain to have an impact in the global economy and the capital market
functioning globally. During the time of sloth economic growth or fall the customers are more
likely to reduce their expenses on the kinds of systems and products that are supplied and are
more likely to experience reduced revenues as a consequence.
Assessment 2
The Big Issues in Australian Economy
Introduction
The Australian economy is considered as one of the predominant economies in the world
and has shown impressive developments in every aspect over the years. However, in the last few
years, the economy has gone back a bit, as shown in the concerned article. There are several
reasons behind this not so impressive performance of the economy of Australia, one of the
primary one being the election and the unsure attitudes of the residents and their risk adverse
attitude. Though there are expectations regarding the economy to cope up in near future, there
are several other concerning issues, which contribute to this stagnating, condition of the country
and poses a threat to the expectations of bouncing back(Dyster and Meredith2012).

12ASSESSMENT 2
Issues: Economic Interpretation
Tapering of Quantitative Easing:
In the recent years, the USA has engaged in tapering or reducing its quantitative easing
which is expect to have its effects on the economy of not only the country itself, but also on the
economy of Australia. The short-term impact of the same includes the lowering down of the
value of Australian dollar though in long term it is expected to catch up. Lowering of the
currency may have positive effect in increasing competitiveness and helping the country to get
out of stagnancy (Mishra, Moriyamaand N'Diaye2014).
Inflation:
The Australian economy has maintained a low rate of inflation, which however, is
expected to increase with the devaluation of currency as more amount of money is circulated for
the purchase of fewer good. Inflation has a positive effect on the economy if allowed at a
controlled rate, as it helps in facilitating economic growth. Therefore, a monitoring on part of the
government is necessary such that the rates do not cross the limiting threshold (Kumar, Webber
and Perry2012).
Housing Boom:
The recent growth in the housing market of Australia, especially Sydney, has led to the
speculators to assume that a boom is going to occur. However, according to the monetary
authority, it may be a part of the recovery from stagnancy as the economy with the emergence of
higher prices is moving out of the low growth period. This however, if not used in a controlled
way may to uncontrolled investment and an actual temporary boom may occur (Randolph and
Freestone2012).

13ASSESSMENT 2
China’s Rebalancing:
China being one of the primary influencer of the Australian economy, the dynamics in
the former effects the latter positively as well as negatively. In the recent period, the economy of
China is undergoing a rebalancing, whereby the household consumption in increasing. This can
prove to be beneficial for Australia as the two countries have strong trading relationships. The
increase in demand in China, clubbed with favoring exchange rate can increase the exports of
Australia (Huang, Chang and Yang2013).
Reshaping of Australian Economy:
The Australian economy in the last decades have grown significantly owing to the boom
in the mining and the iron ore industry. This however is subjected to slow down with the effects
of boom withering away. This in its turn is expected to give way for the new sectors like sevices,
health care and construction, which will mitigate the current slack in the growth.
Australian dollar value:
Much of the country’s economic welfare and recovery depends on the dollar value which
is going to prevail. The currency of the country is highly volatile and is currently at US 90 cents,
which should be at US 85 cents. The value, however will depend on how the economy recovers
and the inflationary pressure in the economy (Stevens2013).
Saving attitude:
In the recent years, the residents of Australia are showing tendencies to decrease
consumption and increase savings, which in turn reduces the aggregate demand and makes the
industries more competitive and cost effective which may be beneficial in the long run.

14ASSESSMENT 2
Interest Rates Dynamics:
In the last few years the cash rate of the country has remained significantly low like in
that of 1959. The inflation rate controlled, this may not have any significant impact. This
however, might have implications on the flexibility of the banks as the interest rates determine
the banks’ ability to lend, which in turn facilitates investments (Stevens 2013).
Conclusion
The issues prevailing in the economy may have positive as well as negative impacts on
the economy, depending upon the growth path taken by the economy and how it manages the
different economic variable.
Assessment 3
Answer to Question 1
Answer to Question 1a
Absolute valuation model is the model, in which an asset value is derived based on the
features of that asset. No consideration has been made in relation to the valuation of other
comparable assets trading in the market. It is considered as the discounted cash flow model and
its usage is wide across the global industries.
Answer to Question 1b
Relative valuation model is the model different from the absolute valuation model, in
which the value of an asset or firm does not depend on the intrinsic model. Instead, this model
believes that the market might be inaccurate about a provided stock. However, for an industry,
the market is accurate.

15ASSESSMENT 2
Answer to Question 1c
The option traders utilise different pricing option models to compute the values of
theoretical option. Most of the investors and professional traders trading large option positions
depend on theoretical value updates for monitoring the varying risk and value of the option
positions along with assisting in trading decisions.
Answer to Question 1d
Fair value is explained as a selling price agreed on the part of both the seller and the
purchaser assuming that both the parties enter the transactions freely. In addition, it depicts the
values of the assets and liabilities of an organisation at the time the financial statements of the
subsidiary firm are consolidated with a parent firm.
Answer to Question 2
Net Present Value (NPV) is a method that helps in determining the overall return on
investment of a particular project. According to the provided scenario, a significant change in the
rate of interest might have favourable or adverse impact on the performance of ANZ Bank.
During inflation, the national banks might raise their interest rates for managing their banking
operations, which might result in lower NPV. Conversely, during economic prosperity, they
might minimise their interest rate, which would increase the overall return on investment for
ANZ Bank.
Answer to Question 3
Inflation targeting is a medium-term average, instead of a rate, which needs to be held at
all times. With the help of this approach, a role is allowed for the monetary policy to dampen the

16ASSESSMENT 2
output fluctuations over the cycle course. For instance, in case of inflation, this policy would
provide short-term stimulus to the economic activity.
Answer to Question 4
When an organisation with greater amount of debt aims to issue equity shares or funding,
the cost of equity generally increases due to share appreciation and expected dividends. In
addition, an increase in debt raises the interest expense and additional cash flows are needed to
cover the interest expense. As a result, the cost of debt for the concerned organisation increases
in tandem with the growing debt.
Answer to Question 5
Eri = Rf + [(ERp – Rf) x ß]
In this case,
Rf (risk-free rate) = 8%
ERp (expected return on portfolio) = 12%
ß (Beta) = 0.9
Expected return on Power Limited shares (Eri) = 0.08 + [(0.12 – 0.08) x 0.9]
Eri = 0.116 or 11.60%
Answer to Question 6
Detail
Projects
X Y Z
Initial Cost 1,00,000 1,20,000 60,000

17ASSESSMENT 2
Economic Life 5 Years 5 Years 5 Years
Expected additional profit(after tax)
Year 1
25,00
0 15,000 9,000
Year 2
25,00
0 16,000 12,000
Year 3
25,00
0 20,000 15,000
Year 4
25,00
0 24,000 17,000
Year 5
25,00
0 25,000 20,000
Rate of return 20% 20% 20%
NPV -25,234.70 -63,193.80 -19,250.26
The NPV method has been considered to evaluate the feasibility of the three mutually
projects. A positive NPV is always preferable, since it denotes profit level for the firm. In this
case, all the projects have negative NPV and thus, it could be stated that none of the projects are
feasible to proceed with in the context of the organisation.

18ASSESSMENT 2
References
Dyster, B. and Meredith, D., 2012. Australia in the global economy: Continuity and change.
Cambridge University Press.

19ASSESSMENT 2
Huang, Y., Chang, J. and Yang, L., 2013. Consumption Recovery and Economic Rebalancing in
China∗. Asian Economic Papers, 12(1), pp.47-67.
Kumar, S., Webber, D.J. and Perry, G., 2012. Real wages, inflation and labour productivity in
Australia. Applied Economics, 44(23), pp.2945-2954.
Mishra, P., Moriyama, K. and N'Diaye, P., 2014. Impact of Fed tapering announcements on
emerging markets.
Randolph, B. and Freestone, R., 2012. Housing differentiation and renewal in middle-ring
suburbs: The experience of Sydney, Australia. Urban studies, 49(12), pp.2557-2575.
Stevens, G., 2013. The Australian dollar: thirty years of floating. Speech to the Australian
Business Economists’ Annual Dinner, Sydney, 21.