Written Assignment : Case Study Scenario

Company Background

Solar X Limited is a new publicly listed company on the ASX that manufacturers and distributes hi-tech monocrystalline silicon solar panels to both domestic and global markets. The capital structure of the company is as follows:

$500,000,000 Ordinary shares currently trading at $20.00

$100,000,000 Preference shares currently trading at $12.50

$200,000,000 8.75% Convertible Notes currently trading at $93.22

Ordinary shareholders are expecting to receive a dividend of $2.50 next year, with anticipated growth of 2% each year thereafter. The preference shares pay a constant dividend of $2.00 and the convertible notes have eight years to maturity with note holders receiving the coupon rate paid six monthly.

Current Proposal

The company is experiencing exponential growth due to their extremely efficient solar panels. The company's current line of solar panels lead the market in helping customers save money on energy while reducing their carbon footprint.

The company believes the next rapid growth area will be in solar storage and the board of directors are committed to pursuing this new market. This investment will also maintain the company's reputation as the market leader in innovation and product development in solar energy.

As general manager of the company's capital budgeting department, the board has asked your team to evaluate a project for the SSS-5000, the ultimate solar storage system, which has the ability for customers to completely disconnect from the grid. The prototype model has cost $4,500,000 in research and development costs and is now in beta testing, in readiness for full production.

Due to capacity constraints with their current production facilities, the company will need additional new plant which will be built on some of the company's land which it owns and the current market value of the land is $2,500,000.

The project requires an initial capital investment (CapEx) of $30,000,000 to build a new plant and purchase equipment. The investment will be depreciated over the life of the project which is estimated to be 4 years. At the end of the project, the plant and equipment is expected to be worth $1,000,000 and the land is expected to be worth $4,000,000 (ignoring CGT and GST).

Anticipated sales are expected to be 5,000 units in the first year. Sales will increase in the next year by 10% and then due to aggressive competition, unit sales will then decline by 20% each year over the remaining life of the project. The company will produce units at a cost of $7,500 each and will sell them for $11,900 each. To supplement the production process, the company will need to purchase $5,500,000 worth of inventory to commence production and that inventory will be depleted during the final year of the project.

There are additional annual fixed costs of $500,000 and the company will need to hire an additional factory supervisor with an annual salary of $100,000. Total research expenses (information gathering for the project analysis) to date are $450,000. The company tax rate is 30% and is paid in the year following the year of income.

Capital Expenditure Investment Criteria

The director's believe the company's risk tolerance and investment time horizon is important due to the rapid change in technology. As a result, the board has adopted the following decision rules for approving capital expenditure; projects need to have a discounted cash flow greater than 50% of CapEx, a minimum internal rate of return of 30% and a payback period of two years.

Required:

1. Prepare a spreadsheet clearly showing the discounted cash flow for each year. The calculations must include the NPV, IRR and the Payback Period of the project. Spreadsheet presentation and functionality will also be graded (refer to the marking guide rubric).

2. Type a 2-page business report making a recommendation whether to accept or reject the project. The executive summary must contain concise reasons for your recommendation and a summary of your financial analysis. Your report must also contain a strong conclusion to justify your analysis of the project.

All supporting sections of the report such as the contents page, reference list and appendices are in addition to the 2-page report. Students are advised to attach all relevant spreadsheets and charts etc. as appendices. (Font style to be used is Calibri and font size is 12 with 1.5 spacing).