It is $31$th December $2023.$

Your team of seven people form a financial analysis team at Aussie Finance Consulting $($AFC$),$ a renowned financial institution. The executive management of AFC has assigned you a task to carry out a special project for its client Victorian Telecomm Limited $($VTL$),$ which requires preparing a business report. This report will be presented to AFC executive management and also to the senior management of VTL$.$

VTL is an Australian telecommunications company. They provide a full range of telecommunication services to corporate and government customers including fixed line voice, data networks and mobility services through a range of carriers offering choice, control and cost reduction. VTL has been in the business for $20$ years now. It is well established and profitably running business thus far. VTL has recently undertaken a market study which costed them $$50,000.$ Findings of the study indicate that it is critical for VTL to upgrade their infrastructure to meet the demand of its customers. They plan to do the upgrade systematically in stages gradually over an extended period, anticipating an annual revenue increase of $$10,000,000$ as a result. For the upgrade, they need some critical hardware components. The management has identified two options: $(1)$ In$-$house production which requires the company to establish their own production facility; and $(2)$ Outsourcing which implies external procurement of the necessary hardware.

After a careful analysis, the management has worked out the following details for the two options:

Option $1$: In$-$house production

The purchase and installation of the machinery shall cost $$3,030,000$ and has an expected life of seven years. The company will fully depreciate the machinery by the straight$-$line method over its life. At the end of its life, the machinery can be sold at an expected residual value of $1\%$ of their original values. The project requires staff to be specially trained to use the new

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CORPORATE FINANCE

machinery; fortunately, a similar equipment was purchased a year ago, and at that time the staff went through the $$10,000$ training program needed to familiarise themselves with the type of equipment. The company$$s management is uncertain whether to charge half of this $$10,000$ training fee to the project. Annual maintenance cost of the machinery is $$150,000.$ The collective cost of the hardware components to be manufactured is estimated to be $$2,030,000$ in Year $1$ with an expected increase of $5\%$ per annum in the following years. VTL also needs to invest in necessary development software and maintain the licenses. The negotiated licensing fee for the software is estimated to be $$50,000$ per year. Finally, the management estimates that they shall need additional net working capital of $$25,000$ at the beginning of the production and further investment of $$5,000$ in NWC will be required at the beginning of each subsequent year. make a free cash flow chart