Expansion of Business & Sale of Goods under Private Label to Cheap & Good

EXAPANSION OF BUSINESS & SALE OF GOODS UNDER PRIVATE
LABEL TO CHEAP & GOOD
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CORPORATE FINANCIAL ASSIGNMENT-INDIVIDUAL
EXECUTIVE SUMMARY
The report details out expansion proposal of Tastegood by selling under the private label of Cheap&
Goods. The report inks out the probable impact of such expansion on other business of the
company. The report further presses on sensitivity analysis form Year 6 and the probable impact of
such announcement on the market value of the shares of the company and any excess earning
earned by the company on account of same in a semi-strong Hypothesis market.
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Table of Content
Contents
EXECUTIVE SUMMARY...........................................................................................................................2
Table of Content....................................................................................................................................3
Purpose of Report.................................................................................................................................4
Net Present Value..................................................................................................................................4
Assumptions involved under the computation..................................................................................4
NPV Analysis......................................................................................................................................4
Sensitivity Analysis.................................................................................................................................5
Assumption........................................................................................................................................5
Abnormal Returns: Semi Strong Form of Market Hypothesis................................................................5
Appendix-1............................................................................................................................................7
Appendix-2..........................................................................................................................................11
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Purpose of Report
Tastegood Limited, a public entity, listed on Australian Stock Exchange is contemplating to expand its
operations by selling finished good in a private label to Cheap & Good. Further, under the said terms
the supply shall be made for a period of 10 years. On the basis of above, the Chief Executive Officer
of the company wishes to understand the profitability of the said project. Further, the report deals
with sensitivity analysis of the said project deals with the abnormal returns earned by the company
on account of announcement of said project. The breakup of the content of the report:
(a) Computation of Net Present Value of the project;
(b) Sensitivity Analysis of the project;
(c) Abnormal Returns: Semi Strong Form of Market Hypothesis.
Net Present Value
Under the said tool of Capital Budgeting, the present value of the cash flows of the project by a
particular discount rate usually Weighted Average Cost of Capital of the company is reduced by the
initial outlay of the project. If the computation is positive, then the project is viable otherwise not.
Further, the higher the value, the more lucrative the project is.
Assumptions involved under the computation
(a) The cash flow assumed holds good;
(b) The cost incurred for installation and shipping of machinery has been considered a cost of the
asset in terms of AASB and accordingly the same has been depreciated using Written down
value method over the period of 10 years;
(c) Yield of debentures has not been considered for analysis as bond market value is not required
as debt to equity ratio has been stated in the question.
(d) The maturity period of bond has not been considered for analysis.
NPV Analysis
On perusal of the appendix 1, it shall be seen that the proposed project has a positive Net present
value which is significantly beneficial for the company and the company shall execute the same as t
it shall add value to the company. Further, it shall be pertinent to note that the said computation
has been derived in the following manner:
(a) Cost of Machinery has been considered by including shipping and installation cost;
(b) Machinery has been depreciated using declining balance method @20%;
(c) Revenue has been expected to increase @10%;
(d) Variable cost has been considered 40% of expenditure;
(e) Opportunity loss has been considered for computation of net present value;
(f) Tax has been deducted from Operating Cash flow @30%;
(g) There has been adjustment on account of changes in Working Capital on account of execution
of the proposed project ;
(h) Machine has been sold at the end of the period and tax impact on the same has been
considered. For detailed analysis refer Appendix 1;
(i) Beta has been computed based on time series and regression analysis;
(j) The discounting factor has been taken at Weighted Average Cost of Capital of the company i.e.
11.54%.
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