Project Information You estimate the investment required to undertake the project will be equal to 20% of the Property Plant and Equipment (PPE) shown in the Core Lithium Ltd 2023 Balance Sheet (page 5). You are also aware that Rural Services Ltd has budgeted to spend $2 million in professional, geotechnical and legal fees appraising the project before making its final decision. You estimate that the revenues in the first year of the project will equal the 2023 Revenue/Average PPE margin you have calculated for Core Lithium, shown on page 6, multiplied by the investment Rural Services will need to undertake the project. Further you are advised that the size of the resource is estimated to provide a five year life for the project and that revenues will grow by 35% in year 2, 25% in year 3, 15% in year 4 and 5% in its fifth and final year. You decide to be guided by the Cost of Sales/Revenue Ratio you have calculated for Core Lithium, as shown on page 6, which you will apply through the entire five year life of the project. Depreciation will be calculated using the diminishing value method with the aim of fully depreciating the investment by the end of the life of the project. You decide to apply the tax rate you calculated for Rural Services Ltd, shown on page 6. During the life of the project, you estimate that the firm will need to provide for an annual increase in net working capital comprising an increase in Receivables and Stock, less an increase in Payables. You have calculated the Net Working Capital/Sales Revenue Ratio of Rural Services Ltd and Core Lithium shown on page 6. You decide to use the 2023 Net Working Capital/Sales Revenue Ratio of Rural Services Ltd to estimate the annual additional amount of Net Working Capital that will be required to service the Incremental Sales Revenue of the project, estimated each year. You also assume that in the year after the final year of the project's life the firm will recover in full this net increase in working capital. In the year after the five year life of the project, you are advised that the company would need to spend $3 million in cleaning up the site and replanting. Your research also shows that the equity risk premium on the ASX is between 4 6%, so you decide to apply a 5% equity risk premium in your estimation of CAPM. Rural Service Ltd 2023 Financial Accounts INCOME STATEMENT million Sales Revenue 1,000.0 Cost of Sales 800.0) Gross Profit 200.0 Selling, General and Administrative Expenses (100.0) EBITDA 100.0 Depreciation (50.0) Interest Expense (7.5) Pre-Tax Profit 42.5 Tax (12.8) Net Profit 29.8 BALANCE SHEET million ASSETS Cash 10.0 Accounts Receivable 200.0 Inventory 150.0 Property Plant and Equipment 250.0 Total Assets 610.0 LIABILITIES Accounts Payable 200.0 Bank Loan 25.0 Corporate Bonds 150.0 Total Liabilities 375.0 SHAREHOLDERS' EQUITY Ordinary Shares 400.0 Retained Earnings (165.0) Total Shareholders' Equity 235.0 Total Liabilities and Shareholders' Equity 610.0 MNotes 1. The interest rate on the bank loan is 65.00% p.a. 2. The corporate bonds have a credit rating of BB and have 5 years to maturity. They make gquarterly coupon payments at a coupon rate of 4% p.a. 3. The ordinary shares are shown on the balance sheet at their book value of 51 per share. They have a beta of 0.51. In 2023, they paid a dividend of 50.03 per share. The dividend is expected to grow at 5% p.a. for the next 3 years, after which it will grow at a constant 3% p.a. in perpetuity. Part 2: Estimate the project's incremental free cash flows (30 marks) a) Prepare the depreciation table for project's investment in PPE, using the Diminishing Value Method. Show your answer formatted as millions to 2 decimal places. (10 marks) Year 1 2 3 4 Opening Book Value less Depreciation Closing Book Value b) Prepare the free cash flow table. Show your answer formatted as millions to 2 decimal places. (20 marks) [ PROJECT 0 1 2 3 4 5 | CASHFLOW STATEMENT million million million million million million million Incremental Sales Revenue Incremental Cost of Sales Incremental Earnings Before Tax & Depreciation Depreciation Pre-Tax Profit Tax Net Profit add back depreciation Investment Change in Net Working Capital Restoration Costs Net Incremental Cashflow Please turn over for Parts 3 and 4 10 Scenario You work as a financial analyst in the Finance division of the Rural Services Ltd an Australian agribusiness company. Rural Services Ltd provides a range of products and services, across rural Australian towns, through a common distribution channel, including beef cattle feedlots, agricultural retail products, agency services, real estate services and financial services. A deposit of lithium ore has been discovered recently on rural property owned by the company. Lithium is a critical element used in various applications, especially in the production of rechargeable batteries, which are used in a wide range of devices such as electric vehicles, smartphones, laptops, and energy storage systems. Additionally, lithium is also used in other industries, including aerospace, ceramics, glass, and pharmaceuticals. The company is in the process of deciding whether or not to develop a mine on the property to extract the lithium to supply the rechargeable battery market in light of the increasing demand for rechargeable batteries. Your company's Chief Financial Officer has asked you to make a recommendation as to whether or not the company should proceed with such a project, notwithstanding the significant diversification such an investment would represent for the company from its core activities. In order to analyse the financial viability of the project you obtain the 2023 Income Statement and Balance Sheet for Rural Services Ltd. Moreover, in order to analyse the risk and return of this project, which is so different from the current activities of Rural Services Ltd, you also obtain the 2023 Income Statement and Balance Sheet for Core Lithium Ltd, a small lithium miner listed on the ASX. These financial statements are provided on pages 4 and 5. You calculate some financial ratios to compare the financial performance of the two companies, which are presented on page 6. You also collect some interest rate information, which is presented on page 7. Core Lithium Ltd 2023 Financial Accounts INCOME STATEMENT Sales Revenue Cost of Sales Gross Profit Interest Income Selling, General and Administrative Expenses Other Non-operating Income/(Expense) EBITDA Depreciation Interest Expense Pre-Tax Profit Tax Net Profit BALANCE SHEET ASSETS Cash Accounts Receivable Inventory Property Plant and Equipment Other Assets Total Assets LIABILITIES Accounts Payable Bank Loan Other Liabilities Total Liabilities SHAREHOLDERS' EQUITY Ordinary Shares Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity million 50.6 (15.8) 34.8 3.0 (21.0) (1.5) 15.4 (3.9) (2.3) 9.2 (1.6) 7.6 million 152.8 6.7 28.9 241.2 73.6 503.1 31.0 83.6 33.6 148.2 370.9 (16.0) 354.9 503.1 Financial Analysis of Rural Services Ltd and Core Lithium Ltd 2023 Rural Core Services Lithium FINANCIAL ANALYSIS Ltd Ltd Sales Revenue/Average PPE Margin 164% 31% Cost of Sales/Revenue Ratio 80% 31% Gross Margin 20% 69% Tax Rate 30% 17% Net Margin 3% 15% Net Working Capital/Sales Revenue Ratio 15% 9% Net Profit/Equity Return 13% 2% Debt/Equity Ratio 74% 24% Credit Rating BB BB Beta 0.51 2.31