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Prepared by LM

Corporate Finance Group Assignment


(Total of 60 points or 20% of final assessment)
Student Name .. Student ID ..
Student Name .. Student ID ..
Student Name .. Student ID ..
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Stark Enterprises (STARK) is an advanced engineering company with close links to
the defence industry. It manufactures high technology and cutting edge defence
products.
The CEO of STARK, Mr. Tony Stark, wants to introduce a new product called IRON
WOMAN into the market and has undertaken some customer and market research at
the cost of $50 Million. He also spent an additional $95 Million on a study to quantify
the cost of converting an existing factory to produce IRON WOMAN. Financing costs
for the factory conversion are calculated at a bank borrowing interest rate of 10% p.a.
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IRON WOMAN
STARKs head designer, Dr. Gary Armond estimates that it can produce and sell one
IRON WOMAN per year for the next 5 years, at which point, IRON WOMAN
becomes obsolete.
The costs are as follows:
Item
Operating costs each year
Plant and equipment (purchased in year 0)
Working capital (required in year 0 and repaid in year 5)
Start-up (required in year 0)
Fixed costs each year
Selling price if each unit

$Billion
1.2
1.1
1.5
4.0
1.0
13.05

Plant and equipment can be depreciated on a straight-line basis over the life of the
project. It has no salvage value.
Mr Tony Stark is also considering another new product named IRON MAIDEN.
Market research and factory conversion studies were $77 Million and $90 Million
respectively. Financing costs for the factory conversion are calculated at a bank
borrowing interest rate of 10% p.a.
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Prepared by LM

IRON MAIDEN
STARKs Director of Engineering, Abe Klein estimates that it can produce and sell
one IRON MAIDEN per year for the next 5 years, at which point, IRON MAIDEN
becomes obsolete.
The costs are as follows:
Item
Operating costs each year
Plant and equipment (purchased in year 0)
Working capital (required in year 0 and repaid in year 5)
Start-up (required in year 0)
Fixed costs each year
Selling price if each unit

$Billion
1.0
1.0
1.5
5.0
1.0
14.029

Plant and equipment can be depreciated on a straight-line basis over the life of the
project. It has no salvage value.
_____________________________________________________________________
The following information is applicable to both IRON WOMAN and IRON
MAIDEN.

Tax is levied at 30%.


The required rate of return is 20% p.a.
All figures are in US Dollars.
Answers must be to 2 decimal places.
The projects are mutually exclusive.
Marks will be deducted for including incorrect items.
Use the two-step method (profit and loss statement plus cash flow statement).
Submit all workings including (profit and loss statement plus cash flow
statement).
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Required:
Question 1. You are required to calculate the NPV ($), IRR (%) and Payback
(months) for both new products. Answers must be to two decimal places. Show all
workings. (48 marks)
Question 2. Which project should Tony Stark adopt? Justify your answer. (5 marks)
(100 word limit)
Question 3. Based on your recommendation in Question 2 (above), Tony Stark would
like to finance the new product by selling Bonds to the market. The bonds are named
IRON BONDS. Using the total costs in year 0 as the total cost of borrowing for the
issue, calculate the market price on issue if the market required rate of return on issue
is 10% p.a.? IRON BONDS pay a coupon rate of interest of 9% p.a. paid semiannually. The IRON BOND is due to mature in 5 years. Answers must be to two
decimal places. Show all workings. (7 marks)
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