In this assignment, you will undertake a capital investment analysis, and describe and appraise capital structure/payout policies. The marking criteria and performance level standards are shown in the rubric at the end of this document. Your submission must be less than +10% of the 1,500 word-count for this assessment (excluding Task 2 appendix showing cash flow details and an assignment reference list). Words beyond this limit will not be marked.
Task 1: Capital Structure and Payout Policy Analysis
For this task, use your case study company (chosen for Assessment 3).
For each policy area, use the following broad approach:
a) Describe the company’s capital structure and payout policies based on annual historical data.
b) Evaluate either the company’s capital structure or payout policy using factors to be considered in setting such policy as they apply to the company’s context.
Your analysis will be mostly qualitative but some basic quantitative measures should be used in describing the company’s policies. Using well labelled graphs in your description is highly recommended (also saves on word count!)
Task 2: Capital Investment Analysis
This task is based on the case information below.
Hotels International Ltd (a fictional company) owns and operates two chains (set up as separate divisions) of three- and four-star hotels in Australian cities. The COVID-19 pandemic has led to a dramatic fall in demand. In planning for a new “COVID normal”, the board wants a thorough review of all equipment and processes to ensure best practice COVID safety measures are met.
A small group of the company’s managers (“the new normal team” or “NNT”) has been put together to develop a capital investment project in line with the board’s directive. The CEO has asked you to undertake a financial analysis of the project based on a five-year life and assuming no terminal value. You will provide your analysis in the form of a memo. NNT has provided you with the following information about the project.
The project involves a complete upgrade of HVAC (heating, ventilation and air-conditioning) across all the company’s buildings (“Project HVAC+”) in one of its chains. After clear indications from the scientific community that the COVID-19 virus can be transmitted through the air, it has become clear that improvements in HVAC systems are vital to ensuring the safety of both customers and staff. Project HVAC+ would also include implementation of a range of new cleaning methods, maintenance and other procedures, certifications, training and a major internal and external marketing campaign.
Therefore, the project is not just an equipment upgrade (quickly and easily copied by competitors) but a complete package to support a competitive advantage for that chain in customer safety. If successful, the project could be replicated in its other chain.
Very recent research by a university PhD student suggests cleanliness and COVID safety measures top the list of the major factors now considered by Australian consumers in choosing accommodation and leisure facilities. Based on this country-wide research, the NNT has tentatively estimated that Project HVAC+ could increase existing forecast annual divisional sales revenue within current capacity constraints by $15 million in the project’s first year. In line with existing divisional revenue forecasts, this benefit is expected to grow by 2% per year (Australian economists’ consensus forecast inflation rate) in the remaining years of the project.
Based on existing divisional forecasts, variable operating costs associated with sales revenue are 30% and no material change in other existing forecast costs are expected, except as noted below. An investment in net working capital equal to 11% of each upcoming year’s sales revenue forecast will also be required, a forecast again in line with existing divisional information. The investment in working capital associated with the project will be fully recovered in the last year of the project.
The project requires an upfront investment in plant and equipment, which based on quotes already received, will be $12 million. Costs will be depreciated to a zero book-value using the prime cost method over five years (useful life from the tax office). However, at the end of the project, some of this equipment will be sold for scrap at a total of $1 million.
Other additional costs directly associated with the project are: (1) marketing and training costs of $6 million (an NTT “guesstimate”) in the first year only; and (2) maintenance and administration costs of $5 million (a reasonably certain estimate) in the first year, increasing by 3% per year (NTT “guesstimate”) for the life of the project. NNT has already spent $0.5 million on reviews of existing equipment, policies, methods and procedures for the project.
Hotels International’s investment bankers advise that the company’s weighted average cost of capital is 10%. The company has a 30% income tax rate. (For the purpose of this case analysis, all taxes are paid in the year of income to which they relate.)
Required:
Analyse the project and prepare a memo to the CEO of Hotels International that summarises your key results and provides recommendations on the project. Note carefully the following points:
• Analyse base case (expected) cash flows and their potential uncertainty.
• For your base case analysis, calculate the five investment decision criteria focused upon in the Week 4 PERCI content.
• If you make any assumptions beyond those given in the case information, briefly explain them (this can be in the appendix with your base case cash flows – see second last dot point below).
• Recommendations should address the decision suggested by your base case, along with further follow up or other matters that the company should consider prior to making a final decision. These additional recommendations should be based on an aspect of your analysis and/or the case information.
• Include an appendix to the memo that provides a clear screenshot(s) or table of your base case cash flows, the purpose of which is to allow the CEO (your marker) to see line item detail if needed.
• Within the memo body, you are advised to use tables and/or figures to assist decision makers in quickly seeing main points and to visualise your analysis results. However, ensure the key point(s) of each table or figure is self-evident, discussed or explained.
MARKING CRITERIA Excellent 50 Very Good 42 Good 33 Satisfactory 25 Developing
12.5 Inadequate 0
Task 1a description
15% The company’s capital structure and payout
policies are very well
described, payout policy in terms of level, form
and stability. Supported
by relevant qualitative information and
quantitative measures that are clearly and
concisely presented
(tables, charts) and correctly interpreted. The company’s capital structure and payout policies are well
described, payout policy in terms of level, form
and stability. Supported
by relevant qualitative information and
quantitative measures that are clearly and
concisely presented
(tables, charts) and correctly interpreted. The company’s capital structure and payout
policies are described, payout policy in terms
of at least two of level, form and stability. Supported by some relevant qualitative information and
quantitative measures that are mostly correctly interpreted. The company’s capital structure and payout
policies are described, payout policy in terms
of at least one of level, form and stability. Supported by some relevant qualitative information and
quantitative measures that are mostly correctly interpreted. While an attempt has been made to describe
the policies, it is
extremely limited or
unsupported by relevant and accurate data or contains mostly
incorrect interpretations. Largely inaccurate,
incomprehensible or unattempted
Task 1b evaluation
15% Several relevant factors have been correctly
applied based on the
company’s context to
make appropriate and well explained
judgements on the policy in a way that
demonstrates surprising insight. Synthesises
judgements to make an
overall evaluation of the policy. Several relevant factors have been correctly
applied based on the
company’s context to
make appropriate and well explained
judgements on the
policy. Synthesises
judgements to make an
overall evaluation of the policy. At least two relevant factors have been
correctly applied to the companys context to
make appropriate and well explained
judgements on its
policy and an overall evaluation is attempted. One relevant factor has been correctly applied to the companys
context to make an
appropriate judgement on the policy. Some
other relevant factors have been noted but
adequately applied or explained. Some relevant factors in setting the policy have been noted but
application to the
companys context is lacking, not clearly explained or incorrect. Largely inaccurate,
incomprehensible or unattempted
Task 2: Estimation of relevant base case cash flows
and five decision criteria
25% All relevant base case cash flows have been
accurately incorporated.
All net cash flows and decision criteria are correct. Nearly all relevant base case cash flows have been accurately
incorporated and all
decision criteria are
correct based on the net
cash flows Most relevant base case cash flows have been accurately
incorporated and
decision criteria are
mostly correct based on the net cash flows. About half the relevant base case cash flows
have been accurately incorporated and
decision criteria are
mostly correct based on the net cash flows. Less than half the relevant base case cash flows have been
accurately incorporated,
or decision criteria may be mostly incorrect
based on the net cash flows. Largely incorrect, incomprehensible
or unattempted, or provides
insufficient detail of cash flows to assess.
Finance for Managers, Assessment 4 Page 4 of 5
MARKING CRITERIA Excellent 50 Very Good 42 Good 33 Satisfactory 25 Developing
12.5 Inadequate 0
Task 2: Analysis of uncertainty
15% Accurately analyses project uncertainty using appropriate techniques.
Insightful and judicious input choices are well-
explained and linked to
case facts. The analysis is very easy to follow. Accurately analyses project uncertainty using appropriate techniques.
Judicious input choices are mostly well-
explained and linked to
case facts. The analysis is easy to follow. Mostly accurately analyses project
uncertainty using
appropriate techniques
Input choices are mostly explained and reasonable. The
analysis is easy to follow. Mostly accurately analyses project
uncertainty using at
least one appropriate technique. Input
choices may be
unreasonable/lacking explanation or the
analysis may be hard to follow. Attempts to use at least one appropriate
technique but with
unjustified/unreasonable input choices in a hard to follow analysis or there are major inaccuracies. Largely inaccurate,
incomprehensible or unattempted.
Task 2
Judgement:
Interpretation and
recommendations
20% Succinctly and accurately interprets base case decision criteria and
uncertainty analysis.
Based on the results, provides insightful
recommendations that incorporate multiple
subtleties within the case context. Accurately interprets base case decision
criteria and uncertainty
analysis. Based on the results, provides appropriate
recommendations well linked to case context. Mostly accurately interprets base case
decision criteria and
uncertainty analysis. Based on the results, provides appropriate
recommendations that go further than simply accepting or rejecting
the project but may be general or not well linked to case context. Mostly accurately interprets base case decision criteria.
Provides an appropriate accept/reject
recommendation on the project. Case
context largely ignored or misunderstood. Mostly inaccurately interprets base case
decision criteria or no
recommendations have been made or
recommendations do not follow from the results or interpretation. Largely inaccurate,
incomprehensible or unattempted.
Communication
10%
Very well organised and presented. Use of
language makes meaning consistently clear.
Outstanding attention to spelling, punctuation, grammar and syntax
(virtually error free). All sources are appropriately referenced. Very well organised and presented. Use of
language nearly always makes meaning clear. Only a few minor errors in spelling, punctuation,
grammar and syntax. All
sources are appropriately referenced. Well organised and presented. Use of
language mostly makes meaning clear. Several
minor errors in spelling,
punctuation, grammar and syntax. Most sources are
appropriately referenced. Fairly well organised and presented. Use of
language mostly makes
meaning clear. Errors in
spelling, punctuation, grammar and syntax
but readability is not hampered. Most sources are referenced. Disorganised and untidily presented, or readability is hampered by errors,
or most sources are not referenced. Largely incorrect, incomprehensible or unattempted.
Finance for Managers, Assessment 4 Page 5 of 5