2. Carling Ltd is a manufacturer of industrial drills. It has £1M earmarked for capital investment in the current year and the Board has identified two projects (each requiring an initial outlay of £1M) from which it will choose.
The company's capital structure at present is:
The company's capital structure at present is:
The two rival projects have anticipated costs and income flows as follows:
Cost 5% 10%
Ordinary shares
Preference shares
Debentures
14Total capital
Income - Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Total income
TeessideUniversity Open Learning
(Engineering)
3
Project 2Project 1
£'000
1000
600
200
150
250
350
200
1750
£M
3
4
7
£'000
1000
100
150
750
450
150
200
1800
4
(a) The Board is considering funding the investment by either a £1M shares issue or a £1M 10% debenture issue. You are asked to explain which method you would choose.
(b) You are asked to evaluate the two projects using:
(i) the payback method (by plotting the data)
(ii) the DCF/NPV technique (assume a 12% cost of capital).
(c) A Board member asks whether risk and uncertainty should be taken into account. You are asked to write a brief report outlining the arguments for and against the suggestion.
3. Using the data from TABLES 1, 2 and 3 below, plot the following graphs:
(i) On one set of axes plot the 2 curves of:
• ‘total sales revenue’ against ‘volume of sales’
• ‘total costs’ against ‘volume of sales’.
The ‘volume of sales’ should be on the x-axis (values from 20 to 26).
(ii) On a second set of axes plot the 3 graphs:
• ‘marginal cost’ against ‘volume of sales’
• ‘marginal revenue’ against ‘volume of sales’
• ‘price’ against ‘volume of sales’.
Again the ‘volume of sales’ should be on the x-axis (values from 20
to 26).
TeessideUniversity Open Learning
(Engineering)
© Teesside University 2011
