7036MAA Financial Decision Making & Risk Analysis – NeuFash Ltd Case Study
Question 1
NeuFash Ltd is a well-known fashion textile manufacturer that has been established a few years, supplying fashion retailers with conventional casual to streetwear clothing.
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NeuFashLtd is considering two mutually exclusive projects, Project A and Project B. Both projects would involve capital expenditure for the purchase of machinery.
Project A is a five-year project that has an initial outlay of $1 000 000. Its future receipts for years 1 through 5 are as follows.
Project B is a five-year project that has an initial outlay of $1 200 000. Its future receipts for years 1 through 5 are as follows.
The required rate of return of 12%.
Required:
- Calculate the Accounting Rate of Return for each project.
Hence, identify which project you would select for acceptance, giving reasons for your choice of criterion that led to your decision. (5 marks)
- While quantitative indicators such as potential rate of returns, are important for selection of projects, it is crucial to consider non-quantifiable benefits too. Critically discuss qualitative factor that needs to be considered for sustained investment in capital assets. (5 marks)
- Critically assess the strengths and weaknesses of both the Accounting Rate of Return and Internal Rate of Return techniques as a tool for the evaluation for this project.
Provide support for your answer. (8 marks)
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Question 2
It has come to the attention of the CEO of NeuFashLtd the market for sustainable fashion has strong growth.NeuFash Ltd is evaluating strategies for setting up research and production facilities for textile recycling.
The CEO has requested for you, a financial analyst, to draft a proposal on expanding existing production facilities to processrecycled textile. This project will involve the purchase of new machines at a cost $100 million. The existing production line was assembled at a cost of $60 million 10 years ago.
Although the cash flows arising from this project is not easy to estimate, you have projected three sets of cash flow under different scenarios; pessimistic, most likely, and optimistic. The director wish to evaluate all three scenarios for decision making. There is no scrap value for the new machine at the end of useful life.
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The cash flows projections for the next five years are as follows:
The company has a 10% cost of capital.
Required:
- Calculate each scenario’s Payback Period. (6 marks)
- Calculate each project’s Net Present Value (NPV). Briefly discuss the result under the different scenarios (9 marks)
- Calculate each project’s Profitability Index (PI). Briefly discuss the result under the different scenarios (7 marks)
- Critically assess the strengths and weaknesses of both the Net Present Value and Payback Period technique to the director as a tool for the evaluation for this project. Provide support for your answer. (10marks)
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Question 3
- The shareholders of NeuFash Ltdwere recently paid a dividend of $5.80 for each unquoted shares held. The projected growth rate for dividends is 4.5% for the foreseeable future. Assuming the required rate of return is 12%, using the dividend discount method, calculate the value for each share price.
(3 marks)
b. You have suggested to the founders that there is an alternative method to business valuation; using the Capital Asset Pricing Model (CAPM).
You have gathered the following information on the market:
- 6-monthUS Treasury Bill rate is 3.55%
- The average S&P 500 index return for the past 10 years is 10.8%
- Equivalent industry beta is 1.5
- Calculate the required rate of return of investors using the CAPM model.
(4 marks)
- Using the required rate of return from part (i), calculate the value of each share
(4 marks)
c.Critically discuss THREE advantages of using CAPM valuation over Dividend Discount valuation.
(9 marks)
Question 4
NeuFash is seeking to optimize its pricing strategies within its supply chain. The company is known for its commitment to sustainability and environmental responsibility. The goal is to enhance competitiveness while maintaining ethical standards in the highly dynamic fashion market.
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NeuFash’s supply chain involves sourcing used textiles raw materials, manufacturing processes, and distribution to retail partners. The company is considering two pricing strategies:
- Value-Based Pricing:NeuFash aims to set prices based on the perceived value of its products, considering the environmental benefits, efficacy, and customer preferences.
- Geographic Pricing: The company is exploring the option of adjusting prices based on geographic factors such as regional demand, distribution costs, and local economic conditions.
How do the implementation of value-based and geographic pricing strategies within NeuFashLtd’s supply chain impact the company’s ethical standing?
Critically evaluate the ethical implications for various stakeholders, including customers, suppliers, and the environment. Provide a critical analysis of the ethical considerations associated with each pricing strategy.