short-term financing/Finance S1 2016
short-term financing/Finance S1 2016
The answer should be free from 100% plagiarism. Please only answer the Question 3. The question is attached in a upload file. Question 3 is related with short term financing. please answer to this question very carefully. first part of this question is one mark, so answer should be according to the question. The second question is of 3 marks, so answer should be of 200-250 words.
This assignment has a 35% weighting in your overall mark for this unit and focuses on content from
Topics 6, 7 and 8. It will be marked out of 35 and consists of three main questions. Marks will be
allocated as indicated for each question below. Your total assignment submission should not exceed
seven A4 pages, excluding cover sheet and reference list.
Question 1: Capital Budgeting Task (18 marks total)
You are helping NCC Technologies with its capital budgeting decisions. The company is a producer
and wholesaler of electronic parts, has a 15% cost of capital and is subject to a 30% tax rate. There
are two major proposals on which NCC Technologies would like your advice.
1. The device part project
NCC Technologies is considering whether it should expand into production of a part for a new
generation of mobile devices. Trends suggest these devices and their parts will offer high growth in
the early years of a 5-year life cycle.
The new plant and equipment needed to produce the part will cost $1,000,000, which the business
will depreciate for tax purposes using a prime cost rate of 10% per annum. When the project is
wound up at the end of five years, the general purpose equipment is expected to be sold for an
Sales in the first year are expected to be $3,000,000, increasing at a high rate of 15% in the second
and third years and then falling by 20% per year for the last two years of the project as demand
declines due to competing new technologies. Consultants called in previously by NCC Technologies,
who were paid $50,000 in fees, estimated that variable costs for the project will be 50% of its
revenues. Building rental, fixed salaries and other fixed costs directly related to the project are
expected to be $1,400,000 in the first year and increase by 3% per year thereafter. The investment
in net operating working capital related to the project is expected to be 15% of the following year’s
sales revenues. This investment will be recovered by the end of the project. It is also thought that
the project will encourage additional after tax profits of $100,000 per year for NCC Technologies’
existing part range.
2. The conveyer system
NCC Technologies needs to install a conveyer system as soon as possible because the existing
system, which has no scrap value, is beyond repair. Three different systems are being considered.
The first, System A, is the same type of system as the old one – just a newer model. It will last 10
years and cost $35,000 to purchase and install. The second, System B, will last 10 years and cost
$50,000 to purchase and install. The third, System C, will last 20 years and cost $120,000 to purchase
and install. None of the systems will have any expected salvage value but all will be replaced at the
end of their lives.
A2, Finance S1 2016
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After examining all costs, the net cash outflows for each system are: $15,000 per year for System A;
$11,000 per year for System B; and $1,500 per year for System C.
Requirements and marking criteria
Provide NCC Technologies with a memo that provides your recommendations on the two proposals.
Your memo should also include details of your analysis and briefly explain and justify your chosen
methods and any assumptions made. Table format for presenting figures is preferable.
Twelve marks will be allocated to analysis of the device part project and six marks to analysis of the
conveyer system. Marks for each will be awarded for demonstrated understanding of the issues
through: justification of chosen analytical techniques, correct application of those techniques, and
appropriate and insightful conclusions and recommendations.
Question 2: Company analysis (13 marks total)
For this question you are required to further analyse the ASX listed company assigned to you for
a) Briefly describe a likely “average” risk capital budgeting project for the company. Consider its
possible life, cash flow pattern and investment size relative to the company. Also hypothesise
the variables to which NPV might be most sensitive and would therefore need the most focus in
project analysis. No quantitative analysis is needed to answer this question. Focus on qualitative
factors. If the company has several business divisions, choose one for this question. (5 marks)
b) Assess the working capital management of your assigned company, focusing on its cash
conversion cycle for each of the past two financial years. Incorporate the company’s context
within your evaluation and compare with a competitor or other relevant benchmark. As in
Assignment 1, use DatAnalysis to access your assigned company’s financial data.
Question 3: Short-term financing (4 marks total)
No additional research or data is necessary in answering this question. Simply apply your knowledge
from the unit learning materials.
In its 2015 Annual Report, Telstra Corporation Limited stated that (p. 121):
Our commercial paper is used principally to support working capital and short term liquidity.
a) What does the use of commercial paper suggest about the credit risk of Telstra? (1 mark)
b) What asset financing policy does the quote above suggest Telstra may follow? Justify your
answer and outline the benefits of that policy in comparison with alternative policies. (3 marks)
1 Note also that DatAnalysis CCC components are all based on sales revenues, instead of a COGS base for the
components related to inventory and payables. This is not necessarily a problem – just be aware of it in
interpretations and comparisons. Alternatively, you may wish to calculate the inventory and payables