FIN700 Financial Management Group Assignment

The FIN700 Financial Management Group Assignment consists of 4 problems, each involving calculations, and in some cases recommendations. The questions relate to the time value of money, loan repayments, loan terms, alternative investment choice techniques, and capital budgeting. The Assignment will be scored out of 70%, with 20 marks also awarded for quality of Recommendations and 10 for Presentation. Penalties for late lodgment, copying, and plagiarism are severe.

FIN700 – Financial Management
ASSIGNMENT– GROUP
Penalties for late lodgment, as per the Subject Outline, will be strictly applied.
This Assignment consists of 4 problems, each involving
calculations, and in some cases recommendations.
You are required to complete this Assignment in Groups of 2 or 3 or 4 people.
**Groups of 1 or more than 4 persons will incur a penalty of 5 marks out of 30.**
All members of the Group should come from the same Tutorial class. You may
consult and discuss the Assignment topic with others, but you must write up your
answers yourselves. Penalties for copying and plagiarism are severe.
You should follow the following typing conventions:
 Answers to be typed, in the space provided after each question
 If additional pages are required, use the blank pages at the end.
 Times New Roman font (at minimum, 12 pitch), 1.5 line spacing; and
 Left and right margins to be at least 2.5 cm from the edge of the page.
Research, Referencing and Submission
You should quote any references used at the end of each question.
Use Harvard referencing! See http://en.wikipedia.org/wiki/Harvard_referencing
As this is a calculations problem, there is no need to submit via TURNITIN.
Marking Guide
The Assignment will be scored out of 70%, with 20 marks also awarded for
quality of Recommendations and 10 for Presentation, in line with the rubric
in the Subject Outline. This mark will be converted to a score out of 30%.
Dr Mervyn Fiedler, Subject Coordinator, FIN 700. 10 August, 2018.
Do not submit this page submit from page 2 onwards, along with KOI Group
Assignment Cover Page & Marking Rubric.
____________________________________________________________________
***NOTE: When submitting Assignment, please submit from this page onwards,
with a KOI Group Assignment cover page in front,
and a FIN700 Marking Rubric at the back.***
Trimester T218
T218 – FIN700 – Financial Management - Group Assignment Page 1 of 15

FIN700
GROUP ASSIGNMENT
Students: Please complete the following before submitting for marking.
Group members
Student No. Student Name Percentage Contribution to Assignment Signature
1. ………………………………………………………………………………………………
2. ………………………………………………………………………………………………
3. ………………………………………………………………………………………………
4. ………………………………………………………………………………………………
Tutor: Please circle one name:
Dr Mervyn Fiedler; Ms Ruhina Karim; Mr Nishith Panthi;
Mr Masoud Ahmadi-Pirshahid; Mr Paul Power; Dr Gazi Hossain
Tutorial Day …………………………………………………and Time ……………………….
This Assignment consists of four questions. All questions must be answered.
Please answer all questions in the spaces provided after each question.
Two extra pages are included at the end of the Assignment, if more pages are
required, please copy (or extend) page 15.
QUESTION `1 [6 + 4 + 6 = 16 Marks.]
a) This is a two period certainty model problem.
Assume that Bradley Lane has a sole income from Fisher Ltd in which he owns 12%
of the ordinary share capital. Currently, Bradley has no savings.
In August, 2018, Fisher Ltd reported net profits after tax of $800,000 for the last
financial year, 2017-18 (1 July, 2017 to 30 June, 2018), and announced it expects
T218 – FIN700 – Financial Management - Group Assignment Page 2 of 15

net profits after tax for the current financial year, 2018-19, to be 20% higher than
last financial year’s figure. The company has a dividend payout ratio of 70%, which
it plans to continue, and will pay the annual dividend for 2017-18 in late-September,
2018, and the dividend for 2018-19 in late-September, 2019.
In late-September, 2019, Bradley wishes to spend $95,000, which will include the
cost of a new car. How much can he consume in late-September, 2018 if the capital
market offers an interest rate of 10% per year?
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QUESTION 1 continued
b) This is an annual equivalent costs (AEC) problem.
Speedy Delivery Ltd, which operates a courier service, requires a new van. It has
received two quotes. Van A will cost $70,000 now, has a three year life and will cost
$7,000 a year to operate. Van B will cost $90,000 now, has a four year life and will
cost $9,000 a year to operate. The relevant discount rate is 6 per cent per annum.
Ignoring depreciation and taxes, calculate the AEC for each. Which van do you
recommend that Speedy Delivery Ltd buy, and state why?
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QUESTION 1 continued
c) This question relates to the valuation of interest-bearing securities.
Because of the drought, Farmers Bank Ltd has experienced large losses on its rural
loan portfolio and is unable to meet its next two annual interest payments on its
recent issue of unsecured notes. The notes are of $1,000 face value each, mature
in September, 2023 and bear a yearly interest coupon payment of 13%.
The Bank paid the interest due this month (September, 2018), and following a
meeting of creditors, arranged to defer payment of the next two interest coupons
due in September, 2019 and September, 2020 respectively. Under the arrangement
with creditors, the Bank will pay the remaining interest coupons (due in September,
2021, September, 2022 and September, 2023) on their due dates, and pay the two
deferred coupons (without interest) along with the normal final interest payment and
face value of the notes on the maturity date. Farmers Bank Ltd’s notes are now
seen as risky, and require a 19% per annum return.
REQUIRED: Calculate the current value of each Farmers Bank unsecured note.
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QUESTION 2 [(4 + 4) + (2 + 2 + 3 + 3) = 18 Marks]
a) This question relates to the time value of money and deferred annuities.
Ruth Bray is age 42 today and plans to retire on her 63rd birthday. With future
inflation, Ruth estimates that she will require around $1,600,000 at age 63 to ensure
that she will have a comfortable life in retirement. She is a single professional and
believes that she can contribute $3,700 at the end of each month, starting in one
month’s time and finishing on her 63rd birthday.
i) If the fund to which she contributes earns 4.8% per annum, compounded
monthly (after tax), how much will he have at age 63? Will she have achieved
her targeted sum? What is the surplus or the shortfall?
ii) Using the entire fund balance, Ruth then wishes to commence a monthly
pension payable by the fund starting one month after her 63rd birthday, and
ending on her 87th birthday, after which she expects that the fund will be fully
expended. If the fund continues to earn the above return of 4.8% per annum,
compounded monthly, how much monthly pension will Ruth receive, if the fund
balance reduces to zero as planned after the last pension payment on her 87th
birthday?
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QUESTION 2 continued.
b) This question relates to loan repayments and loan terms.
James and Mary Hall wish to borrow $750,000 to buy a home. The loan from the
Federal Bank requires equal monthly repayments over 25 years, and carries an
interest rate of 4.5% per annum, compounded monthly. The first repayment is due
at the end of one month after the loan proceeds are received.
You are required to calculate:
i) The effective annual interest rate on the above loan (show as a percentage,
correct to 3 decimal places).
ii) The amount of the monthly repayment (consisting of interest and principal
repayment components) if the same amount is to be paid every month over the
25 year period of the loan.
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QUESTION 2 continued.
iii) The amount of $Y, if - instead of the above – the Federal Bank agrees that
James and Mary will repay the loan by paying the bank $3,000 per month for
the first 12 months, then $3,500 a month for the next 12 months, and after that
$Y per month for the balance of the 25 year term.
iv) How long (in years and months) would it take to repay the loan if, alternatively,
James and Mary decide to repay $4,400 per month, with the first repayment
again being at the end of the first month after taking the loan, and continuing
until the loan was repaid. [HINT: The final repayment is likely to be less than
$4,400, and will be paid one month after the final full installment of $4,400 is
paid.)
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QUESTION 3 [(2 + 2 + 4 + 3 + 3 + 2 = 16 marks]
This question relates to alternative investment choice techniques
William Slater is considering the following cash flows for two mutually exclusive projects.
Year Cash Flows, Investment P ($) Cash Flows, Investment Q ($)
0 -60,000 -60,000
1 20,000 30,000
2 30,000 30,000
3 44,000 30,000
You are required to answer the following questions:
i) If the cash flows after year 0 occur evenly over each year, what is the payback
period for each project, and on this basis, which project would you prefer?
IN THE REMAINING PARTS, ASSUME THAT ALL CASH FLOWS OCCUR AT THE
END OF EACH YEAR.
ii) Would the payback periods then be any different to your answer in i)? If so,
what would the payback periods be?
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QUESTION 3 continued.
iii) If the required return is 8% per annum, what are:
- The net present values of each project?
- The present value (or profitability) indexes of each project?
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QUESTION 3 continued.
iv) Calculate the internal rate of return (IRR) for each project.
[NOTE: It is satisfactory if the approximate IRR is calculated for Investment P
by trial and error, and stated as a percentage correct to the nearer whole
number. The IRR for Investment Y, where the positive cash flows form an
ordinary annuity, should be calculated as a percentage exactly, correct to 1
decimal place.]
v) Calculate the exact crossover point (an interest rate, expressed as a
percentage correct to two places of decimals) of the respective net present
values (NPVs) for the above projects.
vi) Having regard to the above calculations, state – with reasons - which of
investments P and Q you would prefer.
T218 – FIN700 – Financial Management - Group Assignment Page 11 of 15

QUESTION 4 [18 + 2 = 20 marks].
This question relates to capital budgeting.
Bayside Ferries Ltd is considering the purchase in September, 2018 of two new small
hydrofoils costing $480,000 each, which it will fully finance with a fixed interest loan of
9% per annum, with interest paid monthly and the principal repaid at the end of 4 years.
The hydrofoils will be used in the company’s passenger transport business.
The two new hydrofoils will replace three existing steam ferries and will permit the
company to reduce its energy and labour costs by a total of $160,000 a year, over the
next 4 years. [Assume these savings are realized at the end of each year.]
The new hydrofoils may be depreciated for tax purposes by the straight-line method to
zero over the next 4 years. The company thinks that it can sell the hydrofoils at the end
of 4 years for $75,000 each.
The three old ferries being replaced were bought two years ago for $300,000 each, with
a then life expectancy of 6 years, and are being depreciated by the straight-line method
to zero over 6 years. If the company proceeds with the above purchase, the old ferries
will be sold in September, 2018 for $170,000 each.
This is not the first time that the company has considered this purchase and
replacement. Twelve months ago, the company engaged Sea Travel Consultants, at a
fee of $25,000 paid in advance, to conduct a feasibility study on savings strategies and
Sea Travel made the above recommendations. At the time, Bayside Ferries Ltd did not
proceed with the recommended strategy, but is now reconsidering the proposal.
Bayside Ferries Ltd further estimates that it will have to spend tax-deductible amounts of
$30,000 in 2 years’ time and $40,000 in 3 years’ time overhauling the hydrofoils.
It will also require additions to current assets of $30,000 at the start of the hydrofoils
project, which will be fully recoverable at the end of the fourth year after purchase.
Bayside Ferries Ltd’s cost of capital is 11%. The tax rate is 30%. Tax is paid in the year
in which earnings are received.
REQUIRED:
(a) Calculate the net present value (NPV), that is, the net benefit or net loss in present
value terms of the proposed purchase costs and the resultant incremental cash
flows.
[HINT: As shown in the text-book, it is recommended that for each year you
calculate the tax effect first, then identify the cash flows, then calculate the overall
net present value. Finally, make your recommendation.]
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QUESTION 4 continued.
For Old Three Ferries
Cost of Old Ferries = $ 300000 X 3 = $ 900000
Savings each year for next 4 year = Energy and Labour Cost = $ 160000
Proceeds of Old Ferries = $ 170000 each = $ 170000 X 3 = $ 510000
Life Span of Old Ferries = 6 years
Old Ferries for purchased 2 years ago
Depreciation on Ferries = (Total Cost- Salvage Value after Life Span)/ Life of an Ferries
= ( $ 900000 – 0)/ 6 = $ 150000
For Two Hydrofoils
Cost of New Hydrofoils = $ 480000 X 2 = $ 960000
Life of Hydrofoils = 4 Years
Salvage Value of New Hydrofoils = $ 75000 each = $ 75000 X 2 = $ 150000
Depreciation on Hydrofoils = (Total Cost- Salvage Value after Life Span)/ Life of an
Hydrofoils
= ( $ 960000 – $150000)/ 4 = $ 202500
Overhauling of Hydrofoils (Tax Deductible) = $ 30000 in 2 years and $ 40000 in 3 years
Additional Current Assets = $ 30000
Additional Interest on Loan for 4 years (Tax Deductible) = Loan Amount X Rate of
Interest = $ 960000 X 9%
=$ 86400 per year
Cost of Capital = 11%
Tax Rate = 30%
Net Present Value :-
Net Present Value= (Present Value of Cash Inflows – Initial Outflows) in 4 years
= $ 507000 +$60604 +$ 37554 +$28714 - $ 469497
= $ 164374
(b) Should the company purchase the new hydrofoils? State clearly why or why not.
Decision - The Company shall purchase the two hydrofoils as it has the positive Net
present value of $164374.
Justification - Net present value is one of the best technique of capital budgeting which
helps in undertaking the best decision of whether to invest in the particular proposed
investment or not. Net present value is calculated by deducting the present value of cash
outflows from the present value of cash inflows. The discounting rate is usually the
capitalization rate which is used for calculating the present value of cash inflows (Lee,
2015). The tax saving effect on the depreciation and on the sale of the old equipment is
taken. The decision criteria on the basis of method of Net Present Value is that if it comes
out as positive then the project will be undertaken otherwise the same shall be rejected
(Richmond, 2018).
END OF ASSIGNMENT QUESTIONS
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ADDITIONAL PAGE 1 (for workings, or if your answers take more space)
REFERENCES
Lee, I., (2015), “The Internet of Things (IoT): Applications, investments, and challenges
for enterprises” Business Horizons, 58(4), pp.431-440.
Richmond, A., (2018), “Direct net present value open pit optimisation with probabilistic
models” Advances in Applied Strategic Mine Planning ,pp. 217-228.
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ADDITIONAL PAGE 2 (for workings, or if your answers take more space)
T218 – FIN700 – Financial Management - Group Assignment Page 15 of 15

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