MBA - ADVANCED CORPORATE FINANCE

doktor

Main

Home >Homework Answsers >Business & Finance homework help

ASSIGNMENT BRIEF

Thiscourseworkassignmentconsistsofonepieceofworkdividedintotwoparts. You should ensurethatyou answerallthesections.

Beverages&SpiritsLtd (B&S Ltd)hasbeenmanufacturing beverages. In recentyearsB&SLtd has notedthatitscostshaverisensubstantiallyanditisconsidering closingoneormore ofits production plants.

ProjectedannualfuturecostsandrevenuesforeachplantareasshowninTable1.Theprojected costsandrevenuesareperunit.Inall,B&S Ltdexpectstosell100,000unitsof each beverage eachyear.

Table1

CostsareinUSD$

Factory	Revenues	Materials	LabourCosts	Overheads
Orange	60	10	5	25
Apple	180	130	25	45
Peach	100	20	60	20
Pear	350	85	225	150

Eachfactorylasts,intotal,forfiveyearsandthenbecomesobsolete.Theinitialcostof each factory and the associated research and development costs for each beverage were as

shown in Table2 Factory	Table 2. Thesewerepaid InitialCost($)	two years ago when productioncommenced. ResearchandDevelopment
Orange	10,000,000	Costs($) 2,000,000
Apple	15,000,000	5,000,000
Peach	20,000,000	1,000,000
Pear	30,000,000	2,000,000

B&S Ltd must also pay a service charge on the factory, which is payableimmediatelyif productionatthefactorycontinues.TheseareshowninTable3.Theservicefeeisnotpayableif productionendsatthefactoryimmediately;insteadeach factorycouldbesoldfortheamounts detailedinTable3.Theseamountswillberealised onlyif production endsimmediately.

Table3

Factory	ServiceCharge($)	ResaleValue($)
Orange	10,000,000	4,000,000
Apple	2,000,000	8,000,000
Peach	3,000,000	3,000,000
Pear	6,000,000	7,000,000

Note:

Depreciationischargedonastraightlinebasisoverthelifeoftheproject.

Researchanddevelopmentexpenditureistreatedinthesameway.Ignoretaxation.The

estimatedcostofcapitalforB&SLtdis13%.B&SLtd has$180,000,000investedinindex

linkedgiltswhichprovideanannual returnof4%.B&S LtdusuallyappliesNPVandIRR

investmentappraisalmethods. Itdoesnotcurrently usepayback.

Required:

(a)

Discuss whether B&SLtd should rationalise and end production in any of the factories producing thebeverages. Ifso, suggest which factories should be closed and explain youranswer fully. Explain whatreservationsyoumay have.

(45marks)

(b)

IfB&SLtdfacedashortageofcash[e.g.BankHaircut]andwasable to meetservice charges up to a total value of only $10,000,000, which factorieswould B&SLtd decidetokeepopen?