AF4S31 Assessment 2

AF4S31 Assessment 2 (V2) Brief
This assignment will be marked out of 100%This assignment contributes to 50% of the total module marks.The assessments are bonded which means you need 40%+ over both assessmentscombined to pass the module.Learning Outcomes to be assessedAs specified in the validated module descriptor available at: outcome 1The ability of students to critically assess, apply and evaluate the issues and techniquesof strategic financial management.
Grading CriteriaPlease see School’s marking criteria for undergraduate/post graduate assessments onthe module VLE. Any additional grading/marking guidance will be posted withassessment task below.
AssignmentAYR Co. is considering two separate projects known as ‘Aspire’ and ‘Wolf’ whichare quite different but each of which has the potential to increase AYR Co.’smarket share. To date $120,000 has been spent on market research into theincrease in demand that can be expected for each project. The next stage is toconduct a financial appraisal to determine which project should be taken forwardas AYR Co. can only afford to fund one project at this time.Project Aspire:This project will require the acquisition of plant and machinery costing $2,250,000which is payable immediately. This machinery will have a scrap value of $375,000at the end of the 5 years. There is also $140,000 working capital to be usedimmediately. This amount has been taken from the company’s retained profitsand will be repaid at the end of the project. Cash inflows are expected to be$650,000 in year 1 rising at a rate of 7.5% per annum for years 2 to 5 inclusive.Variable costs in year 1 are expected to be $27,000 per annum and are expectedto rise at 6.75% per annum. Capital allowances are available on the plant andmachinery as follows:$Year 1Year 2Year 3Year 4Year 5600,000390,000345,000300,000240,000This project will expand the current product range and will appeal to existing andpotential customers.
Project Wolf:This project will require an immediate outlay of $2,250,000. This expenditure willnot attract capital allowances. Annual cash inflows of $955,000 are expected tobe constant for the life of the project. Material costs are expected to be $14,400 inthe first year, rising at an annual inflation rate of 7.5% per annum. Otherexpenses are expected to be $18,000 in year 1 and these are expected to fall by7.5% per annum over the life of the project.To undertake Project Wolf, factory space which is currently generating rentalincome will need to be used for the project. The rental income, which would nothave been expected to change over the five-year period, is $75,000 per annum.This project will take the company in a new direction appealing to a different typeof customer.Additional financial information: Corporation tax is paid at a rate of 20% and tax is payable one year inarrears. The weighted average cost of capital is 10% and, unless otherwise stated,cash flows occur at the end of the year to which they relate. A straight line method of depreciation at a rate of 20% is applied to all noncurrent assets.The initial investment of $2.250m, for whichever project is chosen, is significant interms of value for AYR Co. The board of directors is considering ways to financethe investment, and will choose between, increasing equity by issuing newordinary shares, or taking on new debt in the form of a bank loan at a fixed rate ofinterest.AYR Co. is currently financed as follows:Capital Employed $millionEquity holder funds 20Long term debt 18Total 38Required:Prepare a report to the Directors of AYR Co. which includes the following.1. A calculation of the Net Present Value (NPV), Internal Rate of Return (IRR)and Payback Period for projects Aspire and Wolf. Detailed calculations shouldbe included as an appendix to the report. All cash flows should be rounded to
the nearest $. 30%2. Analysis and evaluation of the investment project options as follows:i. A recommendation regarding which project (if any) to undertake;ii. Justifications for your recommendation including an evaluation of theinvestment appraisal techniques used in task 1 above.iii. A summary of other factors that should be considered and informationthat may be needed prior to making a final decision. 30%3. A discussion of the two sources of finance being considered by the board ofAYR Co. Your report should include:i. A description of Equity and Debt.ii. An explanation of the costs of each source of finance.iii. An analysis of the effect the selection of the source of finance may haveon AYR Co.’s weighted average cost of capital.iv. An assessment of the impact of the selection of finance on current andpotential shareholders and lenders.30%Marks are available for presentation of the report, which must not exceed 3,000words. 10%Total 100%Marking guidance
Section Weighting Criteria1) Calculation of NPV, IRRand Payback.2) Analysis evaluation andrecommendation. Additionalfactors and information.3) Discussion of two sourcesof finance. Impact on WACCand investors/lenders.30%30%30%Demonstrate: Relevant practical, academic andsubject specific skills Knowledge understanding andappreciation of issues involved. Ability to research and providepractical and relevant points Clear communication, explanationevaluation and discussion of aspectsbeing covered.ReportStructure and presentation 10% Clarity of layout, grammar, presentationand inclusion of all relevant matters Tone and use of professional languagei.e. suitable for addressee of report Accuracy of referencing, andappropriate use of appendices
Assessment guidanceYour report should be word processed, clearly laid out and concise and should besupported by appropriate workings for the numerical elements. The word limit for thereport is 3,000 words.The text of this assignment must be in your own words (not even a sentence or phraseshould be taken from another source unless this source is referenced and the phraseplaced in quotes). It is dishonest not to acknowledge the work of other people and youopen yourself up to the accusation of plagiarism. Referencing should in accordance withthe Harvard System. A guide published by the Library lists the most common types ofreferences with examples. The guide can be found on the module VLEHand-in requirements and dates:Please see the VLEPLEASE NOTE THAT IF YOU ARE EVEN ONE MINUTE LATE UPLOADING YOURFILE THIS WILL COUNT AS A LATE SUBMISSION AND THE APPROPRIATEPENALTY WILL APPLY.

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