Guidelines on Ethical Scholarship, Academic Literacy and Academic Misconduct

Guidelines on Ethical Scholarship, Academic Literacy and Academic Misconduct

This assignment and solutions have been personalised for student 1300801 using random names and values.
Available from 24 Sep 2013. Downloaded 28 Sep 2013 14:21. Due 18 Oct 2013 14:00 at Canning College (refer to
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UWA Business School Cover Sheet Information
Academic misconduct as defined in the “Guidelines on Ethical Scholarship, Academic Literacy and Academic Misconduct” is any activity or
practice engaged in by a student that breaches explicit guidelines relating to the production of work for assessment, in a manner that
compromises or defeats the purpose of that assessment. Students must not engage in academic misconduct. Penalties for academic
misconduct vary according to seriousness of the case, and may include the requirement to do further work or repeat work; deduction of marks;
the award of zero marks for the assessment; failure of one or more units; suspension from a course of study; exclusion from the University;
non-conferral of a degree, diploma or other award to which the student would otherwise have been entitled. For further information on the rules
and procedures in respect of appropriate academic conduct you should visit:
http://www.teachingandlearning.uwa.edu.au/tl4/for_uwa_staff/policies/student_related_policies/academic_conduct
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“I certify that the attached assignment/report is my own work and that all material drawn
from other sources has been fully acknowledged”.
Signed ………………………………………………………………… Date …………………………………..
Marking
Your assignment will be marked by your tutor and returned in a tutorial. Each part of each question will be marked out of 4 as follows:
4 = perfect
3 = good understanding demonstrated, most of the way there, not quite perfect
2 = about half way there
1 = some understanding demonstrated but inadequate
0 = no understanding demonstrated, or blank (tutor will write vertical line through blank space)
Individual solutions will be provided. Your mark should be read in conjunction with the solutions. Tutors will not write long comments.
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Question 1
QJC Limited bought a production machine 3 years ago for $1,350,000 which had an expected life of 15 years. It has
been very successful and QJC is considering replacing it with a larger machine. The new machine will cost
$2,340,000 and have an expected life of 12 years. The old machine could be sold for $454,000 today, or otherwise
at the end of its life for a tenth of this amount. The new machine can be sold at the end of its life for $97,000.
Annual costs are as follows:
Item Old Machine New Machine
Expected Sales $318,000 $561,000
Production costs $52,000 $192,000
The new machine will need $56,000 in working capital, which is three times the amount tied up in the current
machine. QJC has an effective tax rate of 30% per annum and a cost of capital of 18.4% per annum. If QJC
expands they will need a bank loan of $545,000 for 2 years at 5.4% per annum.
(a) What is the NPV of selling the old machine now (without buying the new one)?
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(b) What would be the free cash flow of the new machine in the second year (without selling the old one)?
(c) What is the NPV of buying the new machine (without selling the old one)?
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(d) Answer concisely (short and sharp):
Can the company make a decision on the proposed expansion by using your answers to (a) and (c)?
Circle: YES NO
Why?
If they can, what should their decision be?
Circle: EXPAND DON’T EXPAND
Why?
Alternatively if (a) and (c) do not give enough information to enable a decision,
describe any further steps that would be needed.
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Question 2
A particular conveyor belt needs to be replaced every 8 years to comply with safety rules. A new conveyor belt
costs $191,600. The current conveyor belt is still running and has 3 years of life remaining, however it was
damaged slightly in an accident last year and requires $7,700 of additional safety inspections each year to keep it
running. A used conveyor belt has no salvage value. There is no inflation and no tax. Your company’s cost of capital
is 7.7%. You can choose to replace the current conveyor belt either now or in 3 years.
(a) What is the NPV of deciding to replace the conveyor belt now (hint: forever, every 8 years)?
(b) What is the NPV of deciding to replace the conveyor belt in 3 years (hint: forever, every 8 years)?
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Question 3
You are considering investing $2,551,400 today in a project that will earn $329,400 after tax in its first year and
continue growing each year for ever, increasing in line with prices generally. Inflation is forecast to be 2.6% per
annum, and your discount rate is 6.36% per annum.
(a) Calculate the NPV of this project using real cash flows.
(b) Check that you get the same answer by valuing the cash flows using the Gordon growth model.
If you get different answers, there may be a step missed.
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Question 4
QVP Corporation can buy a machine to make widgets for $1,011,000. The machine can produce widgets at a
variable rate, as needed. The profit on each widget is $2.73. The machine has a life of 6 years and then would have
to be scrapped for no residual value.
QVP estimates there is a 34% probability that sales will be 13000 widgets per year, and 66% probability the sales
will be 66000 widgets per year. The sales figures will become known during the first year, and will stay constant
from then on, throughout the project.
At the end of the 3rd year, QVP has an option to spend $157,000 on the machine to extend its life by a further 8
years, so it would have a total life of 14 years. Whenever the machine is scrapped, QVP will stop making widgets.
There is no inflation and no tax.
(a) Draw a decision tree.
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(b) Determine the NPV of this project if QVP’s cost of capital is 10% per annum.
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