Analysis of Investing and Financing Decisions Finance Coursework (Coursework Sample)

UNIVERSITY OF SOUTH WALES
Business School
MBA
Module Title: Strategic Financial Management
Module Code: AF4S31
Module Tutor: Nikki Petrou
Assessment 2 of 2
Title: Analysis of Investing and Financing Decisions Regarding Two Mutually Exclusive Projects: ‘Aspire’ and ‘Wolf’.
Student No: R1604D1464657
Submission Date: 6 January 2019
Word Count: 2976 Words
MANAGEMENT REPORT
To: The Directors of AYR Co.
From: The Financial Analyst
Date: 6 January 2019
Subject: Analysis of Investing and Financing Decisions Regarding Two Mutually Exclusive
Projects: ‘Aspire’ and ‘Wolf’.
Table of Contents TOC \o "1-3" \h \z \u List of Figures and Tables PAGEREF _Toc533946719 \h iiiList of Acronyms PAGEREF _Toc533946720 \h ivAcknowledgements PAGEREF _Toc533946721 \h v1.0 Introduction PAGEREF _Toc533946722 \h 12.0 Investing and Financing Decisions Regarding ‘Aspire’ and ‘Wolf’ PAGEREF _Toc533946723 \h 12.1 Calculation of NPV, IRR and PBP PAGEREF _Toc533946724 \h 12.2 Analysis and Evaluation of the Investment Project Options PAGEREF _Toc533946725 \h 22.2.1 Recommendation Based On NPV, IRR and PBP PAGEREF _Toc533946726 \h 22.2.2 Justifications for the Recommendation PAGEREF _Toc533946727 \h 22.2.3 An Evaluation of the Investment Appraisal Methods Used PAGEREF _Toc533946728 \h 32.2.4 Summary of Other Factors Affecting the Investment Decision PAGEREF _Toc533946729 \h 42.3 A Discussion of Sources of Finance: Equity and Debt PAGEREF _Toc533946730 \h 62.3.1 Description of Equity and Debt PAGEREF _Toc533946731 \h 62.3.2 An Explanation of the Costs of Equity and Debt PAGEREF _Toc533946732 \h 62.3.3 The Effect of Selecting Equity or Debt on AYR Co.’s WACC PAGEREF _Toc533946733 \h 72.3.4 The Impact of Selecting Equity or Debt on Shareholders and Lenders PAGEREF _Toc533946734 \h 93.0 Conclusion PAGEREF _Toc533946735 \h 10References PAGEREF _Toc533946736 \h 11Appendices PAGEREF _Toc533946737 \h 12Appendix 1. Calculation of NPV PAGEREF _Toc533946738 \h 12Appendix 2. Calculation of IRR PAGEREF _Toc533946739 \h 15Appendix 3. Calculation of Payback Period PAGEREF _Toc533946740 \h 16Appendix 4. Calculation of Debt/Equity Ratio and Capital Gearing PAGEREF _Toc533946741 \h 17Appendix 5. Calculating Cost of Equity and Cost of Debt PAGEREF _Toc533946742 \h 17Appendix 5.1 Calculating Cost of Equity PAGEREF _Toc533946743 \h 17Appendix 5.2 Calculating Cost of Debt PAGEREF _Toc533946744 \h 19
List of Figures and Tables
Fig.1. SWOT Analysis and Investment Decision ……………………………………………5
Fig.2. Effect of Level of Gearing on WACC ….………………...………………….....……. 8
Fig.3. A Graph of Return of Ordinary Shares against the Return of the Market…....……… 18
Table 1. Summary of Results from NPV, IRR and PBP Calculations …….…………………1
Table 2. Each Project’s Expected Impact and Appeal to Customers ……………………….. 5
Table 3. Summary of Advantages and Disadvantages of Equity and Debt …...…….....……. 7
Table 4. Calculation of Project Aspire’s Tax Benefits from Capital Allowance (CA) …..….12
Table 5. Working For Project Aspire’s Cash Inflows and Variable Costs ……………….…12
Table 6. Project Aspire’s Cash flow Table ………………………………………………… 13
Table 7. Working for Project Wolf’s Material Costs and Other Expenses …….…………... 13
Table 8. Project Wolf’s Cash flow Table …………………………………………………... 14
Table 9. Project Aspire’s Cumulative Cash flow Table ……………………………..……... 16
Table 10. Project Wolf’s Cumulative Cash flow Table ….…………………….…....……... 16
Table 11. Change in Debt/Equity Ratio and Capital Gearing Due To Financing Decision ....17
List of Acronyms
CAPM: Capital Asset Pricing Model
DCF: Discounted Cash Flow
EPS: Earnings per Share
IRR: Internal Rate of Return
NPV: Net Present Value
PBP: Payback Period
ROE: Return on Equity
WACC: Weighted Average Cost of Capital
Acknowledgements
I would like to thank the module tutor, Nikki Petrou, for all the guidance.
My wife, Annet Fokushaba, and children: Blessed Maria Atukwasize and Hill Dunstan Atukwasibwe are thanked for their emotional support and prayers.
My Lord Jesus Christ is the power above everything.
1.0 Introduction
The purpose of this report is to analyse investing and financing decisions regarding two mutually exclusive projects: ‘Aspire’ and ‘Wolf’.
This is important because, regardless of which project is undertaken, initial investment of $2,250,000 is significant when AYR Co.’s value is considered.
Financial appraisal was carried out using: Net Present Value (NPV); Internal Rate of Return (IRR); and Payback Period (PBP) methods. It was emphasised that SWOT and PESTEL factors be considered before final decision is taken. Sources of finance were analysed by considering cost of each financing option and effect on weighted average cost of capital (WACC), and shareholders and lenders.
From the analysis, recommendations and justifications were made about which project to undertake and financing option to select.
Section 2.0 contains three subsections: 2.1 – calculation of NPV, IRR, and PBP; 2.2 – analysis and evaluation of investment project options; and 2.3 – a discussion of sources of finance. Section 3.0 gives the conclusion. Finally, references and appendices are given.
2.0 Investing and Financing Decisions Regarding ‘Aspire’ and ‘Wolf’
2.1 Calculation of NPV, IRR and PBP
Detailed calculations have been done for: NPV (appendix 1); IRR (appendix 2); and PBP (appendix 3) and are summarised in table 1 below.
Table 1. Summary of Results from NPV, IRR and PBP Calculations
Appraisal Method

Each Project’s Result

Project Favoured and reason


Project Aspire

Project Wolf


NPV

$413,902

$378,952

Project Aspire

Higher NPV

IRR

16.49%

17.33%

Project Wolf

Higher IRR

PBP

3.63 years

3.07 years

Project Wolf

Shorter PBP

Formulated by the author
The results from the calculations are the basis for recommendation and corresponding justifications in the next subsection.
2.2 Analysis and Evaluation of the Investment Project Options
2.2.1 Recommendation Based On NPV, IRR and PBP
Based on the results of financial appraisal summarised in table 1 (subsection 2.1), it is recommended that Project Aspire be undertaken. This recommendation is justified according to the discussion in the next subsection.
2.2.2 Justifications for the Recommendation
NPV Results