[Answer Check]

1. Quantum Graphite Limited (hereafter known as "QGL") is company that was listed on the Australian Securities Exchange (ASX). On 23 March 2023 the company had a market capitalization of $176.92 million. Quantum Graphite Limited explores, mines, processes, manufactures, and sells flake graphite and related products in Australia and internationally.

2. On 23 March 2023, the company made an ASX Announcement about its "successful completion of initial thermal purification treatment" which is part of the company's plan to mass produce "Uley graphite flakes" which are intended to be used as anode material in Li-ion batteries.

3. QGL directors expect a strong future demand in Li-ion batteries. Based on the "successful completion of initial thermal purification treatment" in March 2023, QGL asks you to assess the potential construction of a "Giga Flake factory" to produce "Uley graphite flakes".

4. In January 2023, QGL commissioned a market study on consumers' positive views on general electrification trends of transportation means, e.g., cars, trucks, ships, or planes. The study cost $250,000. There is debate amongst QGL managers whether this tax-deductible expense should be included in the financial analysis of the Giga Flake factory as a cash outflow in the year 2023 to ensure it is not wasted. The Australian Taxation Office (ATO) has confirmed that business expenses are tax deductible in the same year that the expense is incurred.

5. The factory has a ten-year useful life and is expected to incur capital costs of $1,500,000. To build the factory, QGL plans to borrow $1,000,000 today and to use $500,000 cash to fund the Giga Flake factory. QGL's accountant confirms that interest payments are classified as a business expense and are therefore tax deductible. QGL's bank has offered a $1,000,000 ten-year interest-only loan at 8.9%.

6. QGL owns that land which can be used for the new Giga Flake factory. The land is currently leased to a construction company for$50,000. If the Giga Flake factory is not built, QGL will continue the lease agreement.

7. The factory requires to purchase and install plant and equipment at a cost of $380,000 dollars. Most of the equipment will be purchased from other states and requires transportation to the new factory building at a cost of $31,000.

8. If the factory project goes ahead, QGL will engage a patent lawyer at a cost of $40,000 to protect the technology employed to produce the Uley graphite flakes.

9. QGL plans on building the Giga Flake factory in 2023. The first year of cash flow will be in 2024. In 2024, cash sales of Uley graphite flakes are expected to be 1,100,000 and management forecasts that a sales growth rate of 6% p.a.

10. Annual variable cash costs (excluding staff training) at the new factory are expected to be 26% of each year's cash sales. Annual fixed operating costs are forecast to be $220,000 in 2024 and are expected to increase at a rate of 5% p.a.

11. QGL's annual head office costs $211,000 p.a., regardless of the Giga Flake factory plan. For cost accounting purposes, QGL accountants allocate overhead costs across each business unit and projects. If the new Giga Factory goes ahead, it will be allocated $47,000 of head office costs.

12. Because of the novelty of the technology, all production staff in the new Giga Flake factory must receive training at a cost of $140,000 in the first year of operation. Due to staff turnover, it is assumed that this training will be repeated every two years after that for new staff at a cost of $50,000. The QGL accounting department does not classify training as a part of annual operating costs.

13. The Australian Taxation Office (ATO) has confirmed to QGL that for tax purposes the Giga Flake factory has a twenty-five-year life and the plant and equipment (P&E) assets have an eight-year tax life. While QGL expects that P&E assets can be operated effectively for ten years before requiring replacement, QGL's management accountant depreciates P&E assets over an operational five-year life.

14. In 2022, QGL's total marketing expense for 2023 and 2024 were already budgeted at $45,000. To promote the new Uley graphite flakes product, QGL will approve a further $235,000 of marketing in 2023 only. QGL managers are worried about the impact of this high marketing expense on the 2023 income and they have suggested that the company's entire 2023 marketing expense should be expensed over the new factory's ten-year useful life.

15. The repairs and maintenance expense associated with the Giga Flake factory are estimated at $100,000 for the first five years. After that, QGL expects this amount to double for the rest of the factory's ten-year useful life.

16. QGL will implement a private placement in 2028 to raise an additional$1 million in cash. These funds will be used to develop new technologies outside of the Uley graphite flake technology.

17. QGL assumes that the Giga Flake factory building can be sold for

$700,000 in the year 2033. At that time (i.e., in 2033), the resale value of the plant and equipment is $100,000.

18. The salary of QGL's Chief Executive Officer $470,000 in 2023 and is not expected to change whether the new Giga Flake factory is approved by the QGL's Board of Directors or not.

19. If the Board approves the new flake Giga Flake factory, QGL anticipates that it will require inventory to increase to $321,000 today compared with the existing amount of $45,000. In addition, Accounts Payable is expected to increase by $155,000 to $198,000. Further, the Accounts Receivable balance will increase from the current level of$15,000 to $435,000.

20. QGL has a required rate of return of 15%. Assume the company tax rate will remain at 30%.

Could you please check my answers below.

Based on the Information above and using financial knowledge and principles, provide

1. The cash flows at the start

2. The cash flows over the life

3. The cash flows at the end

4. What is the NPV of the proposed Giga Flake factory, and your recommendation?

Could you please check my answers below.

Additional Questions 5-7 (3 marks) 5. Equity analysts forecast that QGL will pay its first dividend of 10 cents per share in the year 2027 with a dividendgrowth of 5% p.a. thereafter. What is a fair price for an QGL share in 2024? Your Excel result field must contain theformula for your calculation(only providing a number will not give any marks). For example: "=6-3+(7*((1.25)^4))". 6. Some investors prefer receiving dividends, some do not. Provide one argument why investors do not want toreceive dividends. 7. Assume climate change can negatively influence QGL. One important question is how this risk can be accounted forin capital budgeting. Describe one change to one assumption presented in the case that could be implemented inthe capital budgeting model. If your suggestion is implemented, would the NPV increase or decrease? Why?

Could you please check my answers below.

1. Cash Flows at the start Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Funding Giga-Flake-Factory 1,500,000 Purchase/Install of Giga-Flake-Factory -380,000 TEAM MEMBER STUDENT ID STUDENT NAME Equipment Transportation Cost 31,000 24561161 Krish Sethi Patent-Lawyer Fees 40,000 Land Lease Agreement (Forgone) 50,000 Tax Savings on Lease Income -15,000 Working Capital 518,000 Total 466,000 2. Cash Flows over the life Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Uley-Graphite-Flakes Revenue 1,100,000 ,166,000 1,235,960 1,310,118 ,388,725 1,472,048 1,560,371 1.653,993 1,753,233 .858,427 Annual Fixed Operating Expense -220,00 -231,000 -242,550 -254.678 -267,411 -280 782 -294,821 -309,562 -325,040 -341,292 Annual Variable Expense -286,000 -303,160 -321,350 -340.631 -361,068 382.733 405.696 430,038 455,841 483, 191 Staff-Training Expense -140,000 0 -50,000 50,000 0 50,000 Marketing Expense -23,500 -23.500 -23,500 -23,500 -23,500 -23,500 -23,500 -23,500 -23,500 -23,500 Repair-&-Maintenance Expense 100,000 100,000 100,000 100,000 100,000 200,000 -200,000 200,000 200,000 200,000 Head-Office Expense 47,000 -47,000 47,000 -47,000 -47,000 47,000 -47,000 -47,000 -47,000 -47,000 Tax (30%) 85,050 -138,402 -150,468 -148,293 -176,923 -161,410 -161,806 193,168 -210,556 -214,033 Depreciation (Factory) 60.00 01 60.000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 Depreciation (Equipment) -76,000 -76,000 -76,000 -76,000 -76,000 Tax Savings (30%) 40.800 40.800 40.800 40 800 40,800 18.000 18,000 18,000 18,000 18,000 Total 239.250 363 738 391,892 386 817 453,621 394.624 395,547 468 725 509 296 517,411 3. Cash flows at the end Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year Year 7 Year 8 Year 9 Year 10 Working Capital 518,000 Giga-Flake-Factory Sale 700,000 Resell Value of Giga-Flake-Factory 100,000 Tax Gain on Capital Gains 240,000 Total 1.078,000 Grand total for each year 466,000 239,250 363 738 391 892 386 817 453,621 394.624 395,547 468 725 509 296 1.595,411 PV of CF in each year 466,000 208,043 275.038 257,676 221,164 225,530 170 607 148,701 153,227 144,774 394,361 4. (a) NPV 1,733,120 (b) Decision and explanation Execute the project since It has a net present value (NPV) higher than zero, meaning that the project has an expected return on investment (ROI) that is greater than the required rate of return, Thereforethe investment is profitable and adds value to the business with decreased risk. The recommendation is based on the concept that all projects require an initial cash out-flow but are also generally expected to generate future cash flows (inflows). These future cash-flows (inflow) are discounted back to reflect the time value of money. The difference between the present value of cash inflows and the initial cash outflow gives the net present value (NPV) which when positive represents returns on investment (ROI)4. (a) NPV 1,733,120 (b) Decision and explanation Execute the project since It has a net present value (NPV) higher than zero, meaning that the project has an expected retum on investment (ROI) that is greater than the required rate of return, Thereforethe investment is profitable and adds value to the business with decreased risk. The recommendation is based on the concept that all projects require an initial cash out-flow but are also generally expected to generate future cash flows (inflows). These future cash-flows (inflow) are discounted back to reflect the time value of money. The difference between the present value of cash inflows and the initial cash outflow gives the net present value (NPV) which when positive represents returns on investment (ROI) 5. Fair share price $0.69 6. Dividends not preferred Investors may not want to receive dividends because they may prefer that the company reinvest the profits (retained earnings) back into the business, The reinvestment allows the company to finance growth strategies that could lead to increased profitability and higher share prices over the long-term. Generaly, payment of dividends also signals that the company has limited growth prospects or lack of investment opportunities. Hence, some investors prefer to support company reinvestment of profits in hope of higher return over the long terms. 7. Impact of climate change A change in assumptions within the implemented capital budgeting model to account for the risk of climate change would be adjusting the discount rate used within the net present value (NPV) calculation. The higher discount rate would account for the time value of money and riskiness of future cash flows, since there is more uncertainty due to the negative effect of climate change towards QGL business. Hence, the present value of future cash flows would be reduced (less valuable), and this would result in a lower net present value (NPV)