FIN1 Investment Feasibility Report: Brisbane Manufacturing Company Ltd

This report provides a detailed analysis of whether Brisbane Manufacturing Company Limited should purchase new equipment. The analysis begins with the calculation of the Weighted Average Cost of Capital (WACC), which is determined to be market-driven and crucial for understanding borrowing rates. Following the WACC calculation, the report identifies free cash flow to the firm and calculates the Net Present Value (NPV), Internal Rate of Return (IRR), and payback period. The calculations reveal a negative NPV and an IRR lower than the required rate of return, alongside a payback period exceeding the company's four-year criterion. Based on these findings, the report recommends against the purchase decision, as it does not meet the company's financial feasibility requirements according to NPV, IRR, and payback period criteria.

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

EBITDA $4,900.00 $3,976.00 $3,117.92
$5,020.4
9
Tax 30%
Depreciation
$10,000.0
0 $5,000.00 $2,500.00
$1,250.0
0
EBITDA*(1-T) $3,430.00 $2,783.20 $2,182.54
$3,514.3
4
Depreciation*T $3,000.00 $1,500.00 $750.00 $375.00
Net Working capital
recovered
$1,500.0
0
FCFF -$24,500.00 $6,430.00 $4,283.20 $2,932.54
$5,389.3
4
Cumulative Cash flow -$24,500.00
-
$18,070.0
0
-
$13,786.8
0
-
$10,854.2
6
-
$5,464.9
2
NPV -$9,704.84
IRR -10%
Payback Period
More than 4
Years
According, the NPV criteria, a project will be considered as financially feasible if the NPV is
positive. In this case the calculation has shown that there will a negative NPV and hence as
per NPV criteria, the purchase decision won’t be a feasible one.
Again, as per IRR criteria, the project will be feasible only when the IRR is greater that
require rate of return, which is not in this case. Therefore, considering the IRR criteria too, it
can be concluded that the purchase decision won’t be a feasible one.
Finally, the company has a predefined criteria of selection of this project is that they will go
ahead with this investment decision provided, all the expenditure to be covered within a
maximum of 4 years payback period. However, the calculation has shown that the project
payback period is more than 4 years. Therefore, it can be recommended that the purchase
decision would not be accepted in this case.

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