Assignment Task:

Question 1: Capital Budgeting 
You work in the corporate division of Nokia at the head office in Finland. The company is contemplating expanding to more environmentally friendly ways of production and for that reason, a “greener” production appeals to several members of the Board. The Board of Directors, therefore, considers building a new plant using wind energy instead of traditional sources of electricity. The CFO of the company asks you to join the team who will analyse the project and make recommendations about its viability. After weeks of gathering data from various departments of the company you have the following estimations: 

1. The new project is estimated to have a useful life of 25 years. 
2. In order to locate a suitable site on which the new plant can be built, you should pay at the beginning of this project (year 0) a fee to construction developers amounting to £10,000,000. At the end of this project, you should hire specialists to clean the area. The required fee for these activities is estimated to be £5,000,000. 
3. The investment of an additional £2,000,000 would be required at the beginning of this project to cover working capital needs. After 25 years, this working capital will be released for investment elsewhere. 
4. The new plant will use wind energy. The total capital cost for each wind turbine amounts to £1,500,000 and should be paid at year 0. The new plant requires the installation of 200 turbines in total. 
5. In order for the government to grant you permission to build a new plant, you are required to pay annual rental fees for the use of the site in that particular zone as follows: 

annual rental fees


6. You also have to promote the use of green energy to the local community. These advertising costs are expected to be £1,000,000 annually (from year 1 and throughout the life of the project). 
7. The turbines require annual maintenance. The annual maintenance cost per turbine is £60,000 and is expected to remain constant throughout the useful life of this project. 
8. Fixed costs for salaries would be £1,000,000 in the first year of operations. These fixed costs would increase annually for every year until the end of the project by 2.5%. At the end of the project the employees will be offered, in addition to their final year salaries, severance packages amounting in total to £2,000,000. 
9. The development department has found that each turbine can operate 280 days per year (the rest of the days the turbines are shut down for maintenance). 
10. The development department has estimated that the electricity generating capacity of each turbine during the first year of its operation is 17 megawatts per day. Their electricity generating capacity reduces every year by 5%. 
11. The company has agreed with the government, that all electricity generated by this energy farm will be bought at the following predetermined prices:

predetermined prices


Required: 
Using the data above, which depict the ‘most likely’ scenario, determine the Net Present Value (NPV) of the proposed investment. Based on the NPV would you recommend that the company accepts this project? Conduct sensitivity analysis and try to identify variables that are crucial to the viability of this project. Show the relevant calculations and discuss/explain your recommendations. It is important not only to show correct calculations but also to provide a critical discussion of your calculations. 

Question 2 
State the assumption under which the Modigliani and Miller propositions hold. Now assume that you are in a Modigliani and Miller economy and discuss in detail the following statement: “Debt is cheaper than equity, therefore the firms should always finance themselves with debt”. 

Discuss
Essentially this is a written debate where you are using your skill at reasoning, backed up by carefully selected evidence to make a case for and against an argument, or point out the advantages and disadvantages of a given context. You are also expected to use some academic researches/empirical studies to support your discussion. Remember to arrive at a conclusion. 


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  • Uploaded By : Alex Cerry
  • Posted on : March 07th, 2019

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