Renewables plc a wind turbine company is planning to set up wind turbines around the UK. The investment is expected to have only a three year life because of competition and technological advances.
Renewables plc a wind turbine company is planning to set up wind turbines around the UK
Question A (TOTAL 50 MARKS)
Renewables plc a wind turbine company is planning to set up wind turbines around the UK. The investment is expected to have only a three year life because of competition and technological advances. The major cash flows of the project are as below:
Cash Flow Estimation $ 000s
Year 0 Year 1 Year 2 Year 3
Customer Revenues 10,000 14,000 9,000
Operation Costs -3,000 -6,000 -4,000
Asset Investments -7,000 1,000
Government Taxes 0 -4,122.47 -5,095.84 -1,065.22
The finance director has decided to raise capital using both debt and equity. The company would like to maintain the market value ratios of debt and equity at 25:75. If this is done, equity required rate will be 16% and for debt it will be 12%.
Answer the following:
1) Explain what the time value of money is and why it is so important in the field of finance. (7 marks)
2) What is the Weighted Average Cost of Capital (“WACC”). Explain its uses. Calculate the WACC if the project raises the funds using both debt and equity. (NB Show all formulas & workings) (8 marks)
3) Make a recommendation to Renewables plc on the investment plan for the wind turbines project using a net present value approach. (NB Show all formulas & workings) (15 marks)
4) What is the payback period for this project and what are the advantages & disadvantages of the payback period as an investment appraisal technique? Critically compare & contrast the use of net present value as an investment appraisal and valuation tool and other tools or methods that can be used to assist in making both investment and corporate valuation decisions from a financial perspective? (NB Show all formulas & workings and assume revenues, cost & taxes are spread evenly through the year and investment is always made at the end of the year in which it is made) (20 marks)
Total Marks for Question A of Element 2 = 50 marks
Question B (TOTAL 50 MARKS – 25 marks each)
ANSWER ANY TWO ONLY OUT OF THE FOLLOWING QUESTIONS:
(1) Portfolio theory suggests diversification can lower risk. Critically evaluate how effectively we can deal with risk and the various means we can use to limit or assess risk.
(2) Evaluate the key advantages & disadvantages of raising capital via equity and debt, giving practical examples of situations when these might be appropriate
(3) Discuss the importance of Working Capital to a business and consider how you determine its health or otherwise.
Total Marks for Question B (choice of two questions from four) of Element 2 = 50 marks