Subject Code : BFA728
Assignment Task:
BFA728 - Risk/Return Analysis Finance Assessment Answer

This assignment is designed to introduce you to:

• Risk/return analysis as a basis for making investment decisions,

• Explain the risk and techniques associated with evaluating projects,

• Considerations of projects with different lives,

• Financial planning and controlling operations, and

• Additional research skills outside course materials/delivery.

Required:

In your answer you should consider the following:

1. Ensure that you answer all the requirements of each question.

2. Please note new submission rules and submit on MyLO plus a hardcopy to be submitted to the dropbox at the TSBE building Level

3. This assignment consists of Two (2) questions.

For fairness and equity to other students, we will only provide some guidance to direct questions on the assignment (or other assessments), not review partially completed work prior to submission and avoid tutoring students to a solution.

Part 1

Sparta Impressions (SI), is a medium-sized commercial printer of promotional advertising brochures, booklets and other direct mail pieces. The firm’s major clients are Sydney and Auckland based advertising agencies. Recently, SI has not been able to compete effectively with larger printers because of its older inefficient presses. The firm is currently having problems meeting run-length requirements and quality standards cost efficiency.

SI is considering replacing one of its printers with either of two printers – printer A or printer B. Printer A is a highly automated, computer-controlled printer; printer B is a less expensive printer that uses standard technology. To analyse these alternatives, Zion Williams, a financial analyst, prepared estimates of the initial investment and incremental (relevant) after-tax net cash inflows associated with each printer.

Note that Zion plans to amortise both printers over a five-year period. At the end of that time, the printers would be sold, thus accounting for the large fifth-year net cash inflows. Zion believes that the two printers are equally risky and that acceptance of either of them will not challenge the firm’s overall risk. He therefore decides to apply the firm’s 13% cost of capital when evaluating the printers. SI requires all projects to have a maximum payback of four years.

Question

1. Use the payback period to assess the acceptability and relative ranking of each printer.

2. Assuming equal risk, use the following sophisticated capital budgeting techniques to assess the acceptability and relative ranking of each printer: a. Net present value b. Internal rate of return

3. Summarise the preferences indicated by the techniques used in question 1 and 2. Do the projects have conflicted rankings?

4. Draw a net present value profile for each printer on the same set of axes and discuss any conflict in rankings that may exist between NPV and IRR. Explain any observed conflict in terms of the relative differences in magnitude and timing of each projects cash flows.

5. Use your findings in questions 1 to 4 to prepare a brief note for management to indicate on both a theoretical (a) and practical (b) basis which printer would be preferred. Explain any differences in your recommendations.

Part 2

Zion Williams has been asked to prepare a report on potential funding sources for expansion of SI. Zion understands that private equity is a broad term covering instances where investors provide capital for businesses not listed on a stock exchange. This can range from a few thousand dollars seed capital for a venture capital start-up right through to management buyouts worth hundreds of millions of dollars. In return, private equity investors generally take a sizeable stake in the business.

Required

i. discuss the resurgence of the private equity asset class globally

ii. review the different types of private equity investments

iii. explain the opportunities and risks that come with private equity investing

 

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  • Uploaded By : Mitchell Lee
  • Posted on : November 13th, 2018

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