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Master of Business Administration, Postgraduate Diploma and Postgraduate

Certificate in Business Administration

Module: Accounting and Finance [BAM010]

Coursework (January – June 2019 study session)

Submission Deadline: Monday 25 March 2019 at 13:00 GMT

 Please Note: You are permitted to upload your Coursework in the final submission area as

many times as you like before the deadline. You will receive a similarity/originality score which

represents what the Turnitin system identifies as work similar to another source. The

originality score can take over 24 hours to generate, especially at busy times e.g. submission

deadline.

 If you upload the wrong version of your Coursework, you are able to upload the correct

version of your Coursework via the same submission area. You simply need to click on the

'submit paper' button again and submit your new version before the deadline.

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is a change in your Turnitin similarity score, it will be due to any changes you may have made

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 Please note, when the due date is reached, the version you have submitted last, will be

considered as your final submission and it will be the version that is marked.

 Once the due date has passed, it will not be possible for you to upload a different version of

your assessment. Therefore, you must ensure you have submitted the correct version of

your assessment which you wish to be marked, by the due date.

Your overall total word count should not exceed 2,000 words (Weighted at

30% of final mark for the module)

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CASE STUDY: The acquisition of Medilab plc by Athena plc Plaza plc is a large conglomerate with operations in restaurants and hotels. The company has an ambitious strategic plan of fast expansion in coffee shops in city centres and shopping malls, and has hired you to advise the Board of Directors on future investment opportunities. You work closely with the marketing and finance Directors and you have collected the following information regarding six new investments. These investments opportunities are established, independent cafés of various sizes and with different potential. The Financial Director has conducted an initial investigation and has confirmed the owners of the businesses are prepared to sell to Plaza plc at agreed prices. On this basis, the Finance Director has given you the amounts of the initial investment required for each individual investment project, which includes the agreed price and other necessary expenses:

Working with the Directors of the marketing, finance and operations departments of Plaza plc, you have collected information about the net operating cash flows of these investment projects as follows:

The initial investments will be paid immediately and the investments will all have a four-year life. At the end, they will be terminated with no further cash flows. All the forecasted annual net cash flows will be at the end of the year. Plaza plc will use a mix of 50% equity and 50% debt to finance these investments. The cost of equity will be 12% and the cost of debt will be 8%. Required:

a) Estimate the net present value of these investments and recommend to the Board of Plaza plc which of these investments to undertake and which not, given that there is no shortage of investment funds and your predictions will be realised.

b) Estimate the internal rate of return for these investments and make recommendation to the Board based on IRR findings.

c) Discuss potential inconsistencies of your findings using NPV and IRR and explain which is better to use as an investment appraisal method.

Initial Investment

Investment 1 2,400,000

Investment 2 2,250,000

Investment 3 3,000,000

Investment 4 2,630,000

Investment 5 3,750,000

Investment 6 5,000,000

T0 T1 T2 T3 T4

Investment 1 -2,400,000 -750,000 300,000 3,200,000 3,450,000

Investment 2 -2,250,000 -750,000 1,800,000 900,000 450,000

Investment 3 -3,000,000 -1,500,000 3,750,000 -1,500,000 3,750,000

Investment 4 -2,630,000 750,000 1,650,000 -240,000 1,500,000

Investment 5 -3,750,000 1,050,000 1,350,000 1,950,000 1,950,000

Investment 6 -5,000,000 1,050,000 1,800,000 1,600,000 2,400,000

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The Finance Director informs you that some members of Plaza plc Board, which will receive your report and consider these investments, have no finance background and will struggle to understand your arguments about the IRR and its merits and shortcomings. She therefore advises you to prepare an illustration about the IRR using a simple example. She gives you a simple example of the net cash flows of four (4) projects. The cash flows assumed to occur now (at time T0), at the end of the first year (T1) and the end of second year (T2) and suggests to draw the graphs of the NPVs for a number of interest rates.

Required: d) Provide the graph of the NPV of the net cash flows of these four projects (A, B, C and D), as given

in the above table, for various rates that will be used as discount factors. Use this graph to illustrate your discussion of the issues related to the use of IRR as investment appraisal rule.

The Board of Plaza plc has also asked you to include in your report two alternative scenarios: Alternative scenario 1: Explore the possibility that Plaza plc will be able to raise new, less costly, finance for these six investments. It is expected to raise debt at 5% cost and equity at 9% cost and use them again at equal proportions for financing these new investments. The investments will all have the same, as above, four-year life. At the end, they will be terminated with no further cash flows. All the forecasted annual net cash flows will be at the end of the year. Required:

e) Estimate the net present value (NPV) and the internal rate of return (IRR) of these investments with the new cost of capital and compare the findings for the two methods as well as your previous findings.

Alternative scenario 2: The second alternative, which you have to explore, is the case of Plaza plc not to pursue these six investment projects but instead to set up and operate its own cafes by leasing alternative premises. In this case, the initial investment cost will be the same but the subsequent net cash flows will be again at the end of each year but they will change as follows:

T0 T1 T2

A -400 -200 800

B -22,100 50,000 -28,000

C 150 500 -800

D -4,300 10,000 -6,000

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Investment 1 will require £2,400,000 initial investment. The net cash flow in the first year will be 5% of the initial investment and it will grow forever at 2%. Investment 2 will require £2,250,000 initial investment. The net cash flow in the first year will be 6% of the initial investment and it will grow forever at 1.5%. Investment 3 will require £3,000,000 initial investment. The net cash flow in the first year will be 6% of the initial investment and it will grow forever at 1.8%. Investment 4 will require £2,630,000 initial investment. The net cash flow in the first year will be 4.5% of the initial investment and it will grow forever at 2%. Investment 5 will require £3,750,000 initial investment. The net cash flow in the first year will be 5% of the initial investment and it will grow forever at 3%. Investment 6 will require £5,000,000 initial investment. The net cash flow in the first year will be 6% of the initial investment and it will grow forever at 2%. Under this alternative scenario 2, the six new investments will be financed from the newly raised capital, with 50% debt, which costs 5% and 50% equity, which costs 9%. Required:

f) Estimate the net present value (NPV) of these six investment under this scenario 2. Your challenge is to make your point clear and develop short, convincing and factual arguments. Your report should not be longer than 2,000 words. The cover page, formulas, tables, reference list and any appendices do not count towards the overall word count. You should make your report clear and comprehensive as well as complete to read without constructive references to appendices in a way that make them an extension of the report. For that, you are allowed to copy-paste in the main body of your report, properly edited parts of the data from the appendices, which will not be included in the word count. The report should include the following sections:

 Title Page

 Introduction

 Analysis and presentation of your findings. Your presentation should be clear and include any formulas and calculations in the main body of your report

Initial Investment

1st year net cash flow as %

of initial investment growth

Investment 1 -2,400,000 0.05 0.02

Investment 2 -2,250,000 0.06 0.015

Investment 3 -3,000,000 0.06 0.018

Investment 4 -2,630,000 0.045 0.02

Investment 5 -3,750,000 0.05 0.03

Investment 6 -5,000,000 0.06 0.02

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 Critical discussion and recommendations to the management of the company and other parties

 Overall reflection and conclusion

 References

 Appendices (include data, information and calculations) ASSESSMENT CRITERIA: This assignment is worth 30% of the final module mark. Criterion 1: You will be assessed on the structure of your report and clarity of presentation and discussion.

(10 marks) Criterion 2: Estimate the net present value of these investments and recommend to the Board of Plaza plc which of these investments to undertake and which not, given that there is no shortage of investment funds and your predictions will be realised.

(20 marks) Criterion 3: Estimate the internal rate of return for these investments and make recommendation to the Board based on IRR findings.

(20 marks) Criterion 4: Discuss potential inconsistencies of your findings using NPV and IRR and explain which is better to use as an investment appraisal method.

(20 marks) Criterion 5: Provide the graph of the NPV of the net cash flows of these four projects (A, B, C and D), as given in the above table, for various rates that will be used as discount factors. Use this graph to illustrate your discussion of the issues related to the use of IRR as investment appraisal rule.

(10 marks) Criterion 6: Estimate the net present value (NPV) and the internal rate of return (IRR) of these investments with the new cost of capital, as in the Alternative scenario 2 and compare the findings for the two methods as well as your previous initial findings.

(10 marks) Criterion 7: Estimate the net present value (NPV) of these six investment projects under Alternative scenario 2.

(10 marks)

Instructions:

Assessment Criteria:

Please refer to Appendix B of the Programme Regulations for detailed Assessment Criteria.

Plagiarism:

This is cheating. Do not be tempted and certainly do not succumb to temptation. Plagiarised copies

are invariably rooted out and severe penalties apply. All assignment submissions are electronically

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tested for plagiarism. More information may be accessed via:

https://mba.elearning.london.ac.uk/course/view.php?id=5&section=1

Penalties for exceeding the word count:

There are penalties for exceeding the specified word count.

 The maximum word limit for this coursework assignment is 2,000 words (excluding the list of

references).

 You may use less than 2,000 words but in so doing you may be penalising yourself as it is likely

to be challenging to respond to the coursework brief.

 You MUST state an accurate word count (excluding the list of references) at the end of your

work. If you do not state an accurate word count your mark will be reduced by 5 marks.

 The content within the main body of text comprises the overall word count, including in-text

citations, references, quotes, heading and sub-headings. The cover page, reference list and

any appendices do not count towards the overall word count.

 If you submit more than 2,000 words the following penalties apply:

a. Up to 10% more than 2,000 words – your mark will be reduced by 5 marks;

b. For more than 10% than 2,000 words you will receive zero marks for this work.