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FM101 Group Assignment Question

This document provides instructions for a group assignment that is worth 15% and is due on October 3rd, 2019. It states that groups should have 6 members, but smaller groups are allowed for campuses with less than 6 students. Students choose their own group members. No presentation is required. Groups must submit their assignment using the provided template through the assignment dropbox by the deadline. The document also provides two questions for the assignment. Question 1 involves recommending an air conditioning unit for a plant based on capital and operating costs. Question 2 evaluates two projects using NPV, payback period, discounted payback period, and IRR to determine which project(s) to recommend based on independence and mutual exclusivity.

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226 views

FM101 Group Assignment Question

This document provides instructions for a group assignment that is worth 15% and is due on October 3rd, 2019. It states that groups should have 6 members, but smaller groups are allowed for campuses with less than 6 students. Students choose their own group members. No presentation is required. Groups must submit their assignment using the provided template through the assignment dropbox by the deadline. The document also provides two questions for the assignment. Question 1 involves recommending an air conditioning unit for a plant based on capital and operating costs. Question 2 evaluates two projects using NPV, payback period, discounted payback period, and IRR to determine which project(s) to recommend based on independence and mutual exclusivity.

Uploaded by

Reenal
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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FM101 Group Assignment 15%

Due Date: 3rd October 2019

Instruction

1. Must have 6 members per group except those campuses that are less than 6 in totals.
For example, if Tuvalu has 2 students then the group consist only of 2 members,
likewise if Marshall Island has 1 student then the it will be an individual assignment
answer.
2. You choose and decide your own member.
3. No presentation required
4. Submit your group assignment using the template attached below through the
Assignment Drop box no later than 3rd October 2019

Question 1 20 marks

Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the
other of the units; otherwise the highly profitable plant would have to shut down. Two units
are available, HCC and LCC (for high and low capital costs). HCC has a high capital cost but
relatively low operating costs, while LCC has a low capital cost but higher operating costs
because it uses more electricity. The costs of the units are shown below. Kim’s WACC is 7%.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5


HCC -$600,000 -$50,000 -$50,000 -$50,000 -$50,000 -$50,000
LCC -$100,000 -$175,000 -$175,000 -$175,000 -$175,000 -$175,000

a) Which unit would you recommend? Explain.


b) If Kim’s controller wanted to know the IRRs of the two projects, what would you tell him?
c) If the WACC rose to 15% would this affect your recommendation? Explain your answer
and the reason this result occurred.

Question 2 30 marks

A firm with a 14% WACC is evaluating two projects for this year’s capital budget.
After-tax cash flows, including depreciation, are as follows: Project A, IRR = 19.86% and
Project B, IRR = 16.80%

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5


Project A -$6,000 $2,000 $2,000 $2,000 $2,000 $2,000
Project B -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600

a) Calculate NPV, payback, and discounted payback for each project.


b) Assuming the projects are independent, which one(s) would you recommend?
c) If the projects are mutually exclusive, which would you recommend?
d) Notice that the projects have the same cash flow timing pattern. Why is there a conflict
between NPV and IRR?

Template for submission

Name ID # Campus
1.
2.
3.
4.
5.
6.
Answer

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