FBL5030 Value Creation in Business Assignment代写

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  • FBL 5030 Fundamentals of Value Creation in Business Assignment 2 - Finance  Page 1
    FBL5030 Value Creation in Business Assignment代写
    EDITH COWAN UNIVERSITY
    FBL5030
    FUNDAMENTALS OF VALUE CREATION IN BUSINESS
    SEMESTER 2, 2016
    ASSIGNMENT 2 – FINANCE
    Case Study in Finance
    FBL5030 Value Creation in Business Assignment代写
    Salza-Pharmaceuticals
    S UBMISSION  R EQUIREMENTS
    − Due by 8am Monday 31 st October through Turnitin
    − MUST include the ECU assignment cover page (provided on our BB website).
    Please note that if an assignment cover sheet is not included your assignment will not
    be graded.
    − The assignment must be submitted:
     as one document, and
     in one copy by the nominated group leader (if completed in a group)
    C ONTRACT  I NFORMATION 
    − If you complete the assignment in a group you should:
     ONLY IF YOU ARE CHANGING YOUR CURRENT GROUP
    submit a completed and signed FBL5030 assignment contract in person (on
    campus students) or via email (external students) before starting your
    teamwork
     submit an assignment peer review form in person (on campus students) or via
    email (external students) after submitting the assignment
    FBL 5030 Fundamentals of Value Creation in Business Assignment 2 - Finance  Page 2
    A DDITIONAL  I NFORMATION
    − Your assignment should be in the form of business report (please refer to the
    document provided). Your report should include:
    a) Cover / Title page
    b) An Executive Summary (word limit 250)
    c) An introduction (not more than 150 words)
    d) Findings and Discussion – Answers to the given questions written in the body
    paragraphs, with appropriate headings, subheadings, etc. This analysis should
    not exceed 1,400 words
    e) A recommendation based on your findings (not more than 200 words)
    − Use a word processor to prepare assignment on A4 paper. Handwritten assignments
    will not be accepted
    − Choose a legible font face and size (e.g. Times New Roman 12 or Arial 11 would be
    sufficient) and double-spaced your lines
    − Aim for a professional level of document presentation and formatting
    − Do NOT include a reference list in this assignment
    − Support your answers given in the body of the report with relevant Excel workings
    and tables placed in the appendices. You will do this by copying all Excel tables and
    pasting them as a picture / screenshot in your Word document. This minimises the
    chance of a viewing error after uploading on Turnitin
    −  Observe the due date strictly. Extensions can only be granted with supporting
    documentation (e.g. medical certificate or court summons). 
    FBL 5030 Fundamentals of Value Creation in Business Assignment 2 - Finance  Page 3
    C ASE  S TUDY IN  F INANCE  – Salza-Pharmaceuticals
    FBL5030 Value Creation in Business Assignment代写
    Based in Australia Salza-Pharmaceuticals Company was formed in 1995 and is a leading manufacturer of a
    cholesterol busting drug known as Cholo-2 ® . The company’s founder Dr Zaide Salzman initially commenced his
    career with a large German pharmaceutical operator and eventually became CEO of a US listed health company.
    Dr Salzman moved away from the corporate sector to set up his own research house where he collaborated with
    researchers from CEU University in Perth Western Australia. After recently securing seed capital from investors
    Salza-Pharmaceutical Company intends to list on the Australian Stock Market in 2018. By 2013 Salza-
    Pharmaceuticals had signed a significant licencing deal with Aspel for the sales and marketing of Cholo-2 ® . A
    second licencing deal is in the pipeline with Aztor-Zanca after receipt of EU marketing clearance for a gel offering
    treatment and rapid relief for arthritis. As this arthritis gel is still in the early stages of commercial development
    Salza-Pharmaceuticals key cash flow direction is centred on the Cholo-2 ® drug. The company also produces a
    number of lines of health supplements and vitamins. By 2015, the company had a sales turnover of over $15 million
    with profits with excess of $3 million.
    The company’s management recognises the licencing deal with Aspel as a potential company maker and as a
    result wishes to expand its Joondalup primary manufacturing facility. The new drug will cost more, but is superior
    to the primary competing product produced by its closest competitor. As a recent business school graduate working
    as a financial analyst at Salza-Pharmaceutical Company, you must analyse the project and present the findings to
    the company’s executive committee.
    Production facilities for the Cholo-2 ® drug would be set up at the company’s main plant. A new high-tech production
    line facility will cost $1,225,000 inclusive of shipping and installation charges. This machine will have a useful life
    of 9 years, and can be depreciated on a straight-line basis. At the end of 9 years, the machine is expected to fetch
    a salvage value of $175,000. Due to heavy use, the new machine will have to be overhauled at the end of 5 years
    of its useful life, at a cost of $250,000. The cost of the overhaul can be further depreciated on a straight-line basis
    for the remainder of the machine’s life.
    Management is being cautious and wary that the new product may not be as well received in the market as initially
    expected, and are concerned if it is advisable to commit funds to such a large capital expenditure. There is an
    alternative to buy a used production facility from Korea with a remaining useful life of 4 years for an installed cost
    of $575,000. The used machinery can also be depreciated on a straight-line basis but the firm expects it will not
    have any salvage value at the end of its useful life.
    If the company goes ahead with this new production, expenditure of raw materials will have to be increased by
    $125,000 at the start of the first year. The supply contracts include consideration for the impact of inflation on raw
    material prices. Prices are expected to rise at a rate of 3% p.a. starting from the end of the first year.
    Salza-Pharmaceuticals will utilise an unused section of its production plant for this project. The space has been
    unused for several years and consequently has suffered some deterioration. As part of a routine facility
    improvement program, the company spent $95,000 to rehabilitate that section of the plant last year. The company’s
    accountant, Mr Malcolm Smith believes this outlay which has already been paid for and expensed for tax purposes,
    should be charged toward the cholesterol drug project. He contends that if the rehabilitation had not taken place,
    the firm would have to spend the funds anyway to make the site suitable for the new project.
    The company expects to sell 680,000 units of Cholo-2 ®  each year at a price of $5.70 per unit. The new production
    will incur an additional $150,000 per annum in fixed costs. Variable costs are expected to be $2.50 per unit. The
    company will also set aside $45,000 at the start of each year for additional advertising and marketing expenses
    for this new product line. While examining the sales figures, you note a short memo from the company’s sales
    manager expressing concern that sales of Cholo-2 ® will cannibalise existing sales of other products which
    potentially complement Cholo-2 ® . Specifically, the sales manager estimates that the company can expect a
    reduction of $1.1 million in sales per year of their existing fish-oil capsule range of health drugs which they
    FBL 5030 Fundamentals of Value Creation in Business Assignment 2 - Finance  Page 4
    manufacture at the same time. Reduced demand and production of the existing fish oil capsule range will decrease
    related production costs by $360,000. These revenue and cost projections are all expressed pre-tax.
    Salza-Pharmaceuticals is a private company, soundly financed and consistently profitable. Cash on hand is
    insufficient to cover the capital expenditures. However, Mr Harvey is confident that part of the project’s cost can
    be financed with a new bank loan. The company has recently paid up a previous loan with a fixed rate of 10% p.a.
    Preliminary discussions with the company’s bank assures the company that it is in a position to secure a ten-year
    loan at a fixed rate of 7% p.a. with interest payable at the end of each year and the principal owing at maturity. The
    company’s tax rate is 30%.
    At present, the company’s total assets on the balance sheet amount to $8 million. Because the previous bank loan
    has been fully paid off, the company’s equity value matches its asset value. Salza-Pharmaceutical shareholders
    have a 12% p.a. required rate of return for investing in the firm. If the Cholo-2 ®  project is undertaken, the firm will
    borrow $2 million from the bank to fund existing operations. This added liability is expected to raise shareholders’
    required rate of return to 15% p.a.
    The executive committee requests a risk analysis on the project as they aim for profitability, but there are chances
    that it might turn out to be a loser. You met with the marketing and production managers to get a feel for the
    uncertainties involved in the cash flow estimates. After several sessions, they concluded that the following
    variations on the original estimates should be considered:
    •  Unit sales at the end of the first year for the new Cholo-2 ®  can rise by about +35% if market conditions are
    optimistic, or fall by about -35% if market conditions are pessimistic.
    •  Depending on consumer trends and competition, the firm can raise the $5.70 sale price by +25% (at the end
    of the first year) under optimistic estimates, or be forced to decrease the sale price by -25% under pessimistic
    estimates.
    •  The costs of raw materials which have an agricultural source are largely influenced by crop yields, and could
    vary by -30% p.a. and +30% p.a. from the start of the first year under optimistic and pessimistic conditions
    respectively.
    •  The salvage value of the new machine after 9 years of useful life is also uncertain. At best, the firm may be
    able to dispose of the asset for $150,000 but there is also a likelihood the firm cannot find a buyer for the
    machine at all.
    FBL5030 Value Creation in Business Assignment代写
    After reviewing the data provided, you realise that the revenue and cost figures have not been adjusted for inflation
    which is expected to average 3.5% p.a. over the long term. Specifically, the sales price of $5.70 per unit is expected
    to increase at a rate of 3.5% p.a. by the end of the first year. Fixed, variable and marketing/ advertising costs for
    the new product are expected to increase at a rate of 2.5% p.a. from the initial cost estimates because these are
    largely fixed by contracts. The impact of cannibalisation is expected to be constant throughout the life of the project.
    Your task as a financial analyst is to prepare an investment proposal to Dr Salzman and the executive committee
    of Green-Pharmaceutical Company. Your proposal should indicate whether the firm should go ahead with the new
    product offering. You must also discuss which of the following alternatives is advisable.
    •  Option A: The company should purchase a new production line facility immediately or,
    •  Option B: The Company should purchase the used Korean production line facility first, then switch to a new
    production line facility at the end of 4 years. (Note: the capital costs are not affected by inflation)
    You are also required to provide summaries of the risk analyses for sensitive variables and inform management of
    break-even sales volumes and prices. Your proposal should address the list of requirements below.
    FBL 5030 Fundamentals of Value Creation in Business Assignment 2 - Finance  Page 5
    Required:
    1. Calculate the appropriate Weighted Average Cost of Capital (WACC) for the company if this project proceeds.
    Apply this rate as the project’s required rate of return.
    2. Prepare the incremental cash flow tables for Options A and B. Assume revenue and cost estimates from
    paragraph 7. Include adjustments for inflation in your cash flow forecasts. Discuss if the following items should
    or should not be included in the incremental cash flow tables.
    •  Interest expenses on the $2 million loan;
    •  The $95,000 spent last year to rehabilitate the plant; and
    •  The reduction in sales of existing products and associated production costs.
    3. Using the base-case scenarios, determine the NPVs and IRRs of this project. On the basis of these measures,
    should the project be undertaken and if so, which option is more beneficial to the firm?
    4. Consider the impact of unequal lives for Options A and B. Does this change your recommendation in (3)?
    5. Consider the sensitivities of the project’s value against variations to: unit sales, sale price per unit, costs of
    raw materials, and the salvage value. Advise management which two variables will need to be scrutinised
    carefully if the project is implemented.
    6. Using the base-case scenarios for Options A and B, determine:
    •  how low sales volume will have to fall to,
    •  how low sales price will have to fall to, and
    •  how high variable costs will have to rise to;
    before the project becomes unfeasible to the company. Discuss how this impacts your recommendation in (4).
    7. Without any calculations, the company would also like you to start a preliminary discussion on whether the
    production line facility should be leased or purchased outright. Your discussion should consider the
    advantages and disadvantages of adopting an operating or finance lease for the machine. Address how a
    lease arrangement might change your analyses
    FBL 5030 Fundamentals of Value Creation in Business Assignment 2 - Finance  Page 6
    MARKING GUDE
    Q UESTION M ARKS  A LLOCATED
    1. WACC calculations  2 MARKS
    2. Discussion
    Base case table: Option A
    Base case table: Option B
    3 MARKS 
    10 MARKS
    10 MARKS
    3. NPV and IRR
    Discussion
    2 MARKS
    2 MARKS
    4. Unequal lives calculations: Option A
    Unequal lives calculations: Option B
    Discussion
    1 MARKS 
    4 MARKS
    2 MARKS
    5. Sensitivity analysis
    Discussion of results
    8 MARKS 
    2 MARKS
    6. Break even sales volume
    Break even sales price
    Break even variable costs
    Discussion
    1 MARK
    1 MARK
    1 MARK
    3 MARKS
    7. Discuss lease option(s) in this case  8 MARKS
    Presentation, and ELP ( English Language Proficiency )
    quality:
    – Quality of document presentation
    – Language, grammar and spelling
    10 MARKS
    M ARKED OUT OF  70
    SCALED TO  40% OF FINAL GRADE
    N OTE THAT IN EACH CATEGORY ABOVE , MARKS WILL BE ALLOCATED ON THE
    BASIS OF ACCURACY OF COMPONENTS WITHIN THE CATEGORY .
    E . G . MARKS WILL BE ALLOCATED FOR EACH ITEM IN YOUR INCREMENTAL
    CASH FLOW TABLE .
    T HEREFORE IT IS IMPORTANT THAT YOU GIVE A COMPLETE BREAKDOWN OF
    EACH ITEM WITHIN THE INCREMENTAL CASH FLOW TABLE .