Analysis of Investment Decision for Brisbane Manufacturing Company Limited

FIN1 FOF Assignment Semester 22017
Name of the Student
Name of the university

The purpose of this report is to provide an insight whether Brisbane Manufacturing Company
Limited will consider purchase of new equipment or not. The starting point of analysing this
investment decision is the calculation of WACC. The WACC for Brisbane Manufacturing
Company Limited is calculated as mentioned below:
Weight Tax Rate Cost of capital
Debt capital 7.86% 30% 2.77%
Preference Share 32.63% 13%
Ordinary Share 59.51% 12%
Weighted Average Cost of Capital 11.57%
WACC is characteristically market driven, the reason is that the capital structure used in its
calculation comes from current market prices. It indicates that it will help you govern at what
rate the company will be able to borrow.
Also, cost and return to investors can be confusing to those just learning about finance.
However, it's easier to think about it as if they're essentially the same thing, except return is
what an investor would call it and cost is how the company calls it. An investor lends money
in order to generate a return on his investment, while that pay-out or return is the amount the
company has to consider as a reduction to earnings as it looks to satisfy its obligations. On
this WACC is calculated, the next step is to identify the free cash flow to firm and then
calculations of NPV, IRR and payback period.
Calculations of NPV, IRR and Payback period has shown in the below table:
Year Year 0 Year 1 Year 2 Year 3 Year 4
Cost of Equipment $20,000.00
Feasibility Study $3,000.00
Increase in Working Capital $1,500.00
Total Investment $24,500.00
Revenue reduction % 8%
Revenue
$10,300.0
0 $9,476.00 $8,717.92
$8,020.4
9
Salvage Value
$2,700.0
0
Expenses
Cost of Operation $2,700.00 $2,700.00 $2,700.00
$2,700.0
0
Maintenance Cost $1,400.00 $1,500.00 $1,600.00
$1,700.0
0
Revenue Loss (Rent) $1,300.00 $1,300.00 $1,300.00
$1,300.0
0