The management team of Online Jeans Sales have just received a new proposal from one of the firm’s marketing managers. The proposal outlines a new investment to create a Custom Finish Laboratory. Through the lab, online customers will be able to select an option to personalise their jeans in a range of finishes. This proposal was made following the completion of market research costing $100,000.

The capital cost to establish the Custom Finish Lab will be $1,650,000. This cost will depreciated on the straight-line basis to zero over the 8 year productive life of the lab. It is estimated $100,000 will be recovered at the completion of the project as the salvage value of the lab.

In the first year of operations, the new lab is expected to increase the firm’s revenues by $1,445,000. In addition to depreciation, the costs to run the lab will include additional staff costs ($900,000 p.a.), materials costs ($210,000 p.a.), marketing costs ($46,000 p.a.), and other costs ($25,000 p.a.). Over the 8 year life of the lab, these revenues and expenses are expected to change. The following summarises the base-case, worst-case and best-case scenarios concerning these changes:

The firm’s tax rate is 30% and all analysis should be based on after-tax figures. The firm requires a 16% required rate of return on all potential investments.

Required:

• For the base-case, worst-case, and best-case scenarios calculate the following:
  • After-tax cash flows (9 marks).
  • Payback periods (6 marks).
  • Discounted payback periods (6 marks).
  • Net present values (6 marks).
  • Profitability index (3 marks).
• Other than modelling ‘best case’ and ‘worst case’ projections, discuss and describe what other capital budgeting approaches could be taken to allow for the increased riskiness of the estimated future cash flows (5 marks).
• Discuss whether the above proposal should be accepted. Discuss any further information that you may require to help you make the accept/reject decision about this project (5 marks). 
  

Part B (60 Marks) Report

Guidelines:

For this assignment, you are encouraged to use the information provided on the firm’s corporate websites together with the following sources:

• OneSource: Global Business Browser (available through Library Databases: http://library.csu.edu.au/services/find-books-and-other-resources/databases/subject/business)
• Australian Stock Exchange http://www.asx.com.au/
• Yahoo Finance https://au.finance.yahoo.com/
• Reuters http://www.reuters.com/finance/markets

News sources such as those secured through the Library’s ANZ Newsstream and Factiva databases are also likely to be relevant (http://library.csu.edu.au/services/find-books-and-other-resources/databases).

Show all your calculation on the annexure.

Your report should include:

• A brief executive summary.
• Introduction.
• Body (use appropriate headings and sub-headings as relevant sign-posts).
• Conclusion.

The following guide is useful in providing further information on effective report writing: https://interact2.csu.edu.au/webapps/blackboard/execute/displayLearningUnit?course_id=_22905_1&content_id=_1053355_1

Required:

APN Outdoor Group (APO) is an ASX Listed firm which specialises in offering advertising services including digital billboards, static roadside billboards, transit advertising, rail advertising and airport advertising throughout Australia and New Zealand (Reuters, 2017). In 2016, the firm’s sales exceeded AUD$300 million.

Being part of the finance team of APN Outdoor Group, you have been tasked with reviewing and preparing a report on the capital structure of the firm and critique whether the firm has been successful in maximising wealth generation for shareholders. An excelloent source for information specifically on the APN Outdoor Group is the analysis provided by the Wall Street Journal at http://quotes.wsj.com/AU/XASX/APO (Note: this site opens at an overview of APO.AX and historical financial data and ratios for the firm can be accessed by clicking on the link to ‘All Sections’ on the right).

Your report should be 1000 words and cover the following areas:

• Assume that for the 2016 year the firm APO.AU has a Beta of 1.3, that return on the ASX market was 7%, and that the yield on Australian Government bonds was 2.4%.
• Using data from the firm’s 2016 annual report:
  • Categorise the firm’s current capital structure into debt and equity.
  • Calculate the firm’s after-tax Weighted Average Cost of Capital.
• Compare the firm’s capital structure with at least one other firm operating within their industry.
• Critically analyse other key financial ratios for APN.
• Outline any significant changes to have occurred to the firm’s capital structure during the past three years.
• Critically evaluate the extent to which the firm has been successful in maximising wealth for shareholders in the past three years.
• Discuss why it is important for the firm to minimise their cost of capital.
• Recommend possible ways in which the firm could adopt an alternative capital structure and lower their cost of capital.