PART B: Capital Budgeting – 20 marks. Students must answer all question
CSL division is considering installing a mass-production of vaccine plant at their NSW factory. They have two options. They can either purchase a plant that is locally built (Double-Helix) and is untried at this stage (but the sellers have built other, smaller plants) or one that can be purchased and installed in NSW by a company that has built super-plants in Russia (??????? Solutions which is a Russian Firm).
Each supplier has quoted the costs on a delivered and installed basis and the after-tax cash returns per unit from each supplier are forecast below (All figures are in Australian Dollars):
Years Double-Helix ??????? Solutions
Initial
investment Cost: $1,900,000
(including $200,000 for installation & training) Cost: $1,800,000
(including $400,000 for installation & training)
1 $600,000 $900,000
2 $720,000 $500,000
3 $425,000 $705,000
Other information:
• Due to CSL’s excellent credit rating, it has negotiated a cost of financing the machines at 8% p.a.
• The project manager believes that the Double-Helix plant can be sold at the end of three years for $300,000 but ??????? Solutions’ plant would have a salvage value of $200,000. These sales would be added to each project’s final year cash inflow.
a) For which of the four purposes is CSL undertaking this Capital Budgeting programmed? (2 marks, LO2)
b) Which step of this decision-making is often ignored, based on research? (3 marks, LO3)
c) Using a spreadsheet program calculate the Net Present Value of purchasing from each supplier. Paste the relevant cells from the spreadsheet into the Word document. (6 marks, LO2)
d) Calculate the Payback period of purchasing from each supplier. (2 marks, LO2)
e) From which company should CSL purchase? Explain your reasons. (3 marks, LO4)
f) When making investment decisions, what are some other issues (outside the cash flow aspects of the project) may influence decision-making in relation to this project? (4 marks, LO4)
References
The Academic Integrity and Conduct Policy requires the appropriate use of intext citations and bibliography. You must cite all references (information sources) and comply with the expectations for academic writing. (you must use ACU Harvard)
