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ACC511- Managerial Finance

Project Evaluation Report (Task 2)

Semester 1, 2019

Imagine that you have recently joined the finance division at Dell Inc. Prepare a

professional report that answers the following two questions. Guidelines regarding

the format of the report can be found at the end of this file. Please adhere to the

guidelines provided.

Q1) Dell is considering setting-up a new laptop manufacturing plant. The plant

requires an initial investment of $500 million. The equipment will depreciate at the

rate of 10% per annum on diminishing value basis. Dell estimates that it will be able

to produce and sell 500,000 laptops during the first year of operation and every year

the number of units sold will increase by 2%. The plant will continue to operate for 10

years, at the end of which it can be sold for $150 million. The plant will be built on

land that the company owns with an after-tax current market value of $250 million. It

is expected that, at the end of 10 years, the land will be worth $350 million (after-

tax). Dell expects to sell each laptop at a price of $700 with the variable cost of

production at $140 per laptop. Operating the plant requires an investment in

inventory of $100 million, which will be recovered at the end of 10 years. The

company will incur a fixed cost of $25 million every year the plant continues

operating. The required return is 16%. Dell’s marginal tax rate is 45%.

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a) What are the yearly depreciation expenses? That is, make a table which shows

the depreciation expenses every year.

b) What are the yearly cash flows associated with the plant from year 1 to year 9?

That is, make a table in which every step in the calculation of cash-flows is shown.

c) What are the cash-flows in year-0?

d) What are the terminal or year-10 cash flows?

e) Calculate the NPV of the project? Interpret the result.

f) Calculate the IRR and payback period? Provide an interpretation.

g) Suppose you talk to Dell’s CFO and he says, “We apply the same discount rate to

all projects in a category. We do not adjust for project specific risks.” Does this

approach make sense in view of what you have learned in this course?

Q2) Suppose you have analysed the project explained in Q1 and have submitted your

report to the Chief Financial Officer (CFO) at Dell. When you arrived at work on

Friday morning, you found the following memo on your desk addressed to you:

“From: Jason Katz, Chief Financial Officer

RE: Project Evaluation

As you are aware, we are in the process of imposing a greater financial discipline.

From now on, only those projects will be funded that generate sufficient cash-flows

to pay the financing cost every year. The project that you have analysed will be

funded entirely through a bank loan which will be paid-off in 10 equal annual

instalments. Your project must be able to generate sufficient cash-flows to pay these

annual instalments, otherwise, it will not be funded. To understand this requirement

better, I am providing everyone with the following example: Suppose a project with a

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life of 3 years generates cash-flows of 200 million, 150 million, and 80 million in

years 1, 2, and 3 respectively. The project is financed through a loan that requires a

repayment of 100 million every year for the next 3 years. This project will not be

funded because it generates only 80 million in year 3, which is not sufficient to meet

the instalment of 100 million that year.

I would like you to take another look at your proposed project and get back to me by

Monday morning with the answer to the following question: Assuming that your

project is funded entirely through a bank loan that must be paid-off in 10 equal

annual instalments, what is the maximum interest rate on the loan which lets us meet

our financial discipline requirement? I would also like you to provide me with your

feedback regarding this new requirement”

Do the following:

a) Answer the question raised in the memo.

b) Provide your feedback on the new requirement (what are its pros and cons?)

based on the knowledge of finance gained in this course.

Guidelines for the Project Evaluation Report

Your report should be structured as follows:

1. Title Page

2. Executive Summary

3. Introduction

4. Answers to Q1, and Q2

5. Conclusions and Recommendations

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6. References

8. Appendix A: Excel Spreadsheet with detailed calculations

If you choose to do the calculations in excel, then the spreadsheet much be attached

in appendix A, with key numbers and tables cut-and-pasted from excel into the main

document for ease of reading. Please prepare a professional looking report where a

reader does not have to jump back and forth between the main body and the

appendix.

9. Appendix B: Statement of Contribution (must be signed by all group members)

Complete the Table provided on the next page and cut and paste it at the end of

your report in appendix B. The Table requires you to rate your contribution on a

scale of 1 to 5 (where 1 represents very low, 3 medium and 5 very high contribution).

Each group member must sign this statement. Comments are optional. You should

strive to contribute equally towards this task. Note: You can either work individually

on this assessment or work in a group of up to 3 people. The statement of

contribution is not required if you work individually.

Grading of the Report

You would be graded based on the marking rubric for Task 2. The marking rubric is

available in Task 2 Assessment Folder.

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Appendix B: ACC511 Task 2 - Contribution to Group Work

Note: Use a scale of 1 to 5 for rating the contribution of each group member (1 represents very low, 3 represents medium and 5 represents very

high contribution).

Contribution

Introduction Answers

to

questions

Conclusion and

recommendations

Overall

contribution

Signatures Comments (if any)

Name of the

group member

Name of the

group member

Name of the

group member