Weighting – 100% of the marks for this module
This is an individual assignment of about 3,000 words.
You are the senior financial manager in a large listed company, Carr plc. The directors of the company have identified a potential project, which they hope will be successful in increasing the wealth of the shareholders. The project will involve the purchase of new machinery costing £120 million with a life of 6 years, estimated scrap value of £15 million and net cash inflows over the life of the machinery of £35 million for the first three year and £30 million for the last three years. The companies cost of capital is currently 12%.
Little surplus exists within the company to invest in all the potential ventures and, due to limited funds and the board understands that to carry out any of the proposed projects will require them to raise all of the money through increased debt and this will increase the gearing of Carr plc to quite a high level.
As such you are required to produce a report critically addressing the above issues. In doing so the report should cover the following key elements:
1. Calculate the NPV, IRR and payback of the proposed project assuming the money can be raised at the current cost of capital and discuss the usefulness of these models of investment appraisal. (50%)
2. Critically evaluate the nature of gearing and the potential effects of high gearing on perceived risk and cost of capital. (50%)
The University policy on cheating collusion and plagiarism will be applied to this piece of work. Guidance:
Students are encouraged to be inquisitive and innovative in their approach as to what should be included in this report the following may be of some use in providing guidance as to what could possibly be included, although this is in no way meant to be prescriptive.
The aim of the assignment is to help you understand how...
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