Austin Supplies Investment Analysis

This assignment presents an analysis of a proposed replacement project for Austin Supplies. Students are tasked with calculating the Internal Rate of Return (IRR) and Net Present Value (NPV) of the project, using a cost of capital of 14.6%. The analysis should consider the cash flows associated with both the existing operations and the proposed replacement strategy. The goal is to determine whether the replacement project is financially viable and recommend an appropriate course of action for Austin Supplies.

Professional Report

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART 1............................................................................................................................................3
Assessing cost of capital of Aust Capital Supplies......................................................................3
PART 2............................................................................................................................................5
Assessing cost of capital of Aust Capital Supplies......................................................................5
PART 3............................................................................................................................................6
Determining whether company should undertake the replacement or not..................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Corporate finance is one of the main areas that assist in dealing with the sources of
funding and capital structure. Such field of finance enables manager to take appropriate actions
that maximizes shareholder’s wealth. The present report is based on Aust Defence Supplies Inc.
that offers low technology products for defense forces, camping and hiking leisure market. It is
listed on the recognized stock exchange of Australia such ASX. In this, report will shed light on
the cost of capital of Aust supplies. Besides this, it will provide in-depth insight about the extent
to which replacement project will be viable. Further, it also entails that whether company should
select bid option or not.
PART 1
Assessing cost of capital of Aust Capital Supplies
Cost of shares = dividend per share / Current market value of stock + Growth rate of
dividends (Cost of Equity, 2017)
Cost of ordinary share capital
Particulars
Figure
s
DPS 4.34
Current market value 53.25
Growth rate of
dividend 0.102
Growth rate in
dividend 0.1241
Ke 18.35%
Cost of preferred stock
Particulars
Figure
s
DPS 12.1
Current market value 97.5

Growth rate of
dividend 0.102
Growth rate in
dividend 0.1241
Kp 22.61%
Cost of equity (Preferred + ordinary shares)
Particulars Figures Weight
Weigh
t %
figures Figures
preferred stock $243750
$243750
/
$3971250
* 100 =
6% 22.61% 1.4%
Ordinary shares
$372750
0
$3727500
/
$3971250
* 100 =
94% 18.35% 17.2%
Total
$397125
0
Ke 18.6%
Cost of debt
Particulars
Unsecured notes (11
years)
Debentures (8
years)
Settlement date 1/12/2017 1/12/2017
Maturity date 1/12/2028 1/12/2025
Annual coupon rate 0.08 0.11
Bond price 98 111.5
Redemption value (% of face
value) 100 100
Coupon payment per year 2 1
Kd 8.3% (Marcus, 2007) 8.9%
Particulars Number of Face Number of Wei K Kd *

debentures
value
(FV) debentures * FV ghts d weights
Unsecured notes
(11 years) 1000 1000 1000000
52.6
%
8.3
% 4.4%
Debentures (8
years) 900 1000 900000
47.4
%
8.9
% 4.2%
1900000
100
% 8.6%
Kd after tax @
27.5% 6.2%
Calculation of cost of capital
Cost of capital = Kd*W + Ke * W
Particular
s
Figures (in
$)
Weigh
t
Cost of equity or debt (Ke or
Kd)
Ke or Kd *
Weight
Shares 3971250 68% 18.6% 12.59%
Debentures 1900000 32% 6.2% 2.01%
Total 5871250 100% 14.60%
Thus, considering all such aspects it can be presented that cost of equity of Austi supplies
is 14.60% significantly.
PART 2
Assessing cost of capital of Aust Capital Supplies
Y
ea
r
sale
s
Fixe
d
cost
Varia
ble
cost
Depre
ciatio
n
Tota
l
cost
PB
T
PA
T
Cash
flows
PV factors @
12.6%
Discounted
cash inflow
1
300
000
0
3000
00
18000
00
25000
0
2350
000
650
000
47
12
50
72125
0 0.888099 640541.7

2
306
000
0
3000
00
18360
00
25000
0
2386
000
674
000
48
86
50
73865
0 0.788721 582588.5
3
312
120
0
3000
00
18727
20
25000
0
2422
720
698
480
50
63
98
75639
8 0.700462 529828.4
4
318
362
4
3000
00
19101
74.4
25000
0
2460
174
723
450
52
45
01
77450
0.96 0.62208 481801.8
5
324
729
6
3000
00
19483
77.888
25000
0
2498
378
748
919
54
29
66
79296
5.979
2 0.552469 438089.3
Total
discounted
cash inflow 2672850
Initial
investment 1500000
NPV 1172850
Interpretation: The above depicted table shows that NPV associated with the project of
supplying duffel canvas accounts for $1172850 respectively. Thus, by undertaking such
competitive tender, firm will get benefits in monetary terms.
PART 3
Determining whether company should undertake the replacement or not
Calculation of net initial investment
Particulars Figures (in $)
Cost of new machine 1200000
sales proceeds of old machine 46000
Book value of old machine 430000
Loss on sale of machinery 384000

Net initial investment
1200000 +
384000 = 1584000
Computation of depreciation
Particulars Figures (in $)
cost 1200000
Scrap value 150000
Life 6 years
Depreciation expense on new machine
(1200000 –
150000) / 6 =
175000
Replacement
Calculation of IRR
Initial
investme
nt
-1584000
Year
Sales
unit
output
expansio
n by new
machine
ry (in
units)
Total
units
Savin
g or
profit
Tax @
27.5%
Profit
after tax
(PAT)
Depreciati
on
Annual
cash
flows
1
11108
0 11500
12258
0 91935
25282.1
25
66652.8
75 175000
241652.8
75
2
11108
0 12500
12358
0
15447
5
42480.6
25
111994.
38 175000
286994.3
75
3 11108 14000 12508 15635 42996.2 113353. 175000 288353.7

0 0 0 5 75 5
4
11108
0 14000 14000 17500 4812.5 12687.5 175000 187687.5
5
11108
0 14000 14000 17500 4812.5 12687.5 175000 187687.5
IRR -9%
Calculation of NPV
Ye
ar
Annual cash
flows PV factor @ 14.6%
Discounted cash
inflow
1 241652.875 0.8726 210866
2 286994.375 0.76143 218527
3 288353.75 0.66443 191590
4 187687.5 0.57978 108817
5 187687.5 0.50591 94953.8
Total discounted cash
inflow 824753
Initial investment 1584000
NPV -759247
Interpretation: The above depicted table shows that IRR NPV associated with the
replacement project is negative. Thus, firm should avoid making investment in such project as it
put a negative impact on the growth of firm.
CONCLUSION
From the above report, it has been concluded that cost of capital of Austin supplies
accounts for 14.60% respectively. Besides this, it can be inferred that company should consider

bid tender which in turn offers high and positive returns. It can be summarized from the report
that Austin supplies should not undertake replacement strategy. Moreover, negative returns will
be offered by such strategy and so, it should focus on continuing the existing operations.