Advanced Corporate Finance Assignment Brief

Advanced Corporate Finance

This advanced aorporate ainance assignment Brief consists of one piece of work divided into two parts. You should ensure that you answer all the sections.
Beverages & Spirits Ltd (B&S Ltd) has been manufacturing beverages. In recent years B&S Ltd has noted that its costs have risen substantially and it is considering closing one or more of its food production plants

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Projected annual future costs and revenues for each plant are as shown in Table 1.The projected costs and revenues are per unit. In all, B&S Ltd expects to sell 100,000 units of each beverage each year.

Table 1
Costs are in USD$ Factory Revenues Materials Labour Costs Overheads

Orange	60	10	5	25
Apple	180	130	25	45
Peach	100	20	60	20
Pear	350	85	225	150

Each factory lasts, in total, for five years and then becomes obsolete. The initial cost of  each  factory and the associated research and development  costs  for  each beverage  were  as  shown in Table 2 These were paid two years ago when production commenced.

Table 2

Factory	Initial Cost	Research and Development cost($)
Orange	10000000	2000000
Apple	15000000	5000000
Peach	20000000	1000000
Pear	30000000	2000000

B&S Ltd must  also  pay  a  service  charge  on  the  factory,  which  is  payable immediately if production at the factory continues. These are shown in Table 3. The service fee is not payable if production ends at the factory immediately; instead each factory could be sold for the amounts detailed in Table 3. These amounts will be realised only if production ends immediately.

Table 3

Factory	Service Charge	Resale Value
Orange	10000000	4000000
Apple	2000000	8000000
Peach	3000000	3000000
Pear	6000000	7000000

Note: Depreciation is charged on a straight line basis over the life of the project. Research and development expenditure is treated in the same way. Ignore taxation.  The estimated cost of capital for B&S Ltd is 13%. B&S Ltd has $180,000,000 invested in index linked gilts which provide an annual return of 4%. B&S Ltd usually applies NPV and IRR investment appraisal methods. It does not currently use payback.

                                                                   

                                                                                                      

Required

• Discuss whether B&S Ltd should rationalise and end production in any of the factories producing the beverages.If so, suggest which factories should be closed and explain your answer fully. Explain what reservations you may have.
• If B&S Ltd faced a shortage of cash [e.g. Bank Haircut] and was able to meet service charges up to a total value of only $10,000,000, which factories would B&S Ltd decide to keep open?
• Discuss why the Internal Rate of Return method is used more often than NPV by financial directors.
• Overall assignment (Maximum 3600 words-Quotations are not included)

Assignment Specifics  

• Your report should be grounded in relevant theory – use the core and recommended reading.
• Reference all sources appropriately, using the Harvard Referencing System.
• Use Times Roman pt 12, with 1½ or double spacing.
• Pages MUST be numbered.
• Headings and sub -headings should be clear and visible
• The text should flow smoothly, with each section leading naturally and logically to the next.