Case Study #1. is the $750,000 that is used to develop a new technology prototype a sunk cost or do i include it in my NPV calculations?

BEA343 CORPORATE FINANCE MAJOR ASSIGNMENT Due Date: Week 11 - 12.00pm Friday, 19 May, 2017 You need to solve the following two case studies for this assignment: Case Study 1: Emu Electronic Emu Electronics is an electronics manufacturer located in Box Hill, Victoria. The companys Managing director is Shelly Chan, who inherited the company from her father. The company originally repaired radios and other household appliances when it was founded more than 50 years ago. Over the years, the company has expanded, and it is now a reputable manufacturer of various specialty electronic items. You have been hired by the company in the finance department. One of the major revenueproducing items manufactured by Emu Electronics is a smart phone. Emu Electronics currently has one smart phone model on the market and sales have been excellent. The smart phone is a unique item in that it comes in a variety of colours and is preprogrammed to play Jimmy Barness music. However, as with any electronic item, technology changes rapidly, and the current smart phone has limited features in comparison with newer models. Emu Electronics has spent $750,000 developing a prototype for a new smart phone that has all the features of the existing one, but adds new features, such as WiFi Tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smart phone. Emu Electronics production manager has produced estimates of the costs associated with the manufacture of the new smart phone. Variable costs are estimated at $205 per unit and fixed costs for the operation are expected to run at $5.1 million per year. The estimated sales volume is 64000 units in Year 1; 106000 units in Year 2; 87000 units in Year 3; 78000 units in Year 4; and 54000 units in the final year - Year 5. The unit sale price of the new smart phone will be $485. The necessary manufacturing equipment can be purchased at the beginning of the project for $34.5 million and will be depreciated for tax purposes over a sevenyear life (straightline to zero). It is believed the value of the manufacturing equipment in five years time will be $5.5 million. Emu Electronics has a 30% corporate tax rate and a 12% required return. Shelly has asked Robert to prepare a report that answers the following questions: Questions 1) What is the NPV of the project? Justification of each your cash flow and explanation of why you include it in the project evaluation is expected. 2) Shelly still has concerns about the new smartphone because she was not convinced that the sale projections estimated in question 1 were entirely accurate. Thus, she has asked Robert to do a sensitivity analysis to see how changes in the price of the new smartphone will affect the NPV of the project. She has suggested you to do an analysis of the current smart phone market and come up with an estimate of percentage change in the price of the Emu Electronics new smartphone in a) the best case scenario and b) the worst case scenario. a) Based on the estimates of these two scenarios implement a sensitivity analysis to find out how changes in the price of the new smartphone will affect the NPV of the project. b) Justify the percentage changes in the smart phone price that you have used in 2a. 3) Should Emu Electronics produce the new smart phone based on the NPV estimated in Question 1 and based on the sensitivity analysis in Question 2? Explain your decisions. 4) Provide recommendations to help Shelly make a better investment decision on the new smartphone. 5) As previously stated, Emu Electronics currently manufactures a smartphone model. Production of the existing model is expected to be terminated in two years. Suppose Emu Electronics loses sales on the existing smartphone model because of the introduction of the new model. Assume that equipment used to produce the existing models is already depreciated to zero. How would this affect your NPV analysis in Question 1? (Hint: You should point out which variables would change? in which years? Case Study 2: The Beta for Colgate-Palmolive Paul Covili, One of the founders of the firm Covili and Wyatt Ltd, has been talking to Joey (the firms finance manager) about the firms investment portfolio. As with any investment, Paul is concerned about the risk of the investment as well as the potential return. More specifically, because the company holds a diversified portfolio, Paul is concerned about the systematic risk of current and potential investments. One such position the company currently holds is stock in Colgate-Palmolive. Colgate-Palmolive is the well-known manufacturer of consumer products under brand names such as Colgate, Palmolive, Cold Power, Dynamo, Ajax and others. Covili and Wyatt Ltd currently uses a commercial data vendor for information about its positions. Because of this, Paul is unsure exactly how the numbers provided are calculated. The data provider considers its methods proprietary, and it will not disclose how stock betas and information are calculated. Paul is uncomfortable with not knowing exactly how these numbers are being computed and also believes that it could be less expensive to calculate the necessary statistics in-house. To explore this question, Paul has asked Joey to do the following assignments. Questions 1. Go to http://au.finance.yahoo.com and download the ending monthly stock prices for Coca-cola Amatil Limited (ASX code CCL) for the last 60 months. Use the adjusted closing price, which adjusts for dividend payments and stock splits. Next, download the ending value of the S&P/ASX All Ordinaries Index over the same period. For the historical risk-free rate, go to the RBA website (www.rba.gov.au) and find the Interbank overnight cash rate. Download this file. What are the monthly returns, average monthly returns and standard deviations for Coca-cola Amatil share, interbank cash rate, and the S&P/ASX All Ordinary Index for this period? Comment on your calculated returns and standard deviations. 2. Beta is often estimated by linear regression. A model often used is called the market model, which is: [ In this regression, is the return on the stock and is the risk-free rate for the same period. , is the return on a stock market index such as the S&P/ASX index. The symbol is the regression intercept, and, is the slope (and the stocks estimated beta). The symbol, represents the residuals for the regression. What do you think is the motivation for this particular regression? The intercept is often called Jensens alpha. What does it mean? If the asset has a positive Jensens alpha, where would it plot with respect to the SML? What is the financial interpretation of the residuals in the regression? 3. Use the market model to estimate the beta for Coca-cola Amatil Ltd using the last 36 months of returns (The regression procedure in Excel is one easy way to do this). Plot the monthly returns on Coca-cola Amatil Ltd against the index and also show the fitted line. Comment on your calculated beta. 4. When the beta of stock is calculated using Monthly returns, there is a debate over the number of months that should be used in the calculation. Rework the previous questions using the last 60 months of returns. How does this answer compare to what you calculated previously? What are some arguments for and against using shorter versus longer periods? Also, you have used monthly data, which are a common choice. You could have used daily, weekly, quarterly or even annual data. What do you think are the issues here? 5. Compare your beta for Coca-cola Amatil Limited to the beta you find on au.finance.yahoo.com. How similar are they? Why might they be different? Presentation Guidelines: You are expected to submit this assignment in Word or PDF format in a clear and logical manner and should include a cover page (indicating Group name, ALL group members names and student numbers) available on the TSBE website at: http://www.utas.edu.au/businessandeconomics/studentresources/forms. You are required to show your working in all questions; present tables of your analysis in your assignment and describe each step of the calculation. All tables and data must be included in ONE submitted Word or PDF file. You must use size 12 font Times New Roman, 1.5 linespacing, 1inch margins and 1inch top/bottom margins. Tables can be singlespaced and the font size should not be smaller than 8pt; and tables must be numbered sequentially. Any illustrations used must be very clear and easy to understand. Reference Guidelines: Citation in text: Please ensure that every reference cited in the text is also present in the reference list (and vice versa). Unpublished results and personal communications are not recommended in the reference list. Web references: as a minimum, the full URL should be given and the date when the reference was last accessed. Any further information, if known (DOI, author names, dates, reference to a source publication, etc.), should also be given. You must provide full references to sources used in your assignment. You are recommended to use the Harvard referencing system detailed at: http://utas.libguides.com/content.php?pid=27520&sid=329009 Submissions guidelines: Your assignment must be submitted electronically via the Dropbox on MyLO. The electronic copy should be lodged via MyLO no later than 12.00pm Friday, 19 May, 2017. ONLY ONE submission is allowed. The submitted filename must be \"SID_Surname\" in which SID is the student number of the first group member listed on the cover page of the assignment; Surname is the student surname of the first group member listed on the cover page of the assignment. If you have problems submitting your assignment, you MUST contact your lecturer immediately explaining the situation by email AND attach your assignment in the email before the due time. In your email, you must clearly identify in the title of your email that you experiencing a problem in BEA343 Corporate Finance. In the body of the email, explain the specific problem. The late assessment and extension policy applies. Please refer to this policy in the Unit Outline