25300 Capital Budgeting: Michael Hill International Ltd Assignment Answer

The world of business management is not as easy as we think. The students studying this unit have to display technical and theoretical core concepts of finance. You too are one of these students, right? So you must be asked to apply these concepts in decision making for business development.

This is exactly what the assignments in this subject aim to develop. One such assignment is the one involving the analysis of 25300 Capital Budgeting Michael Hill International Ltd.

Here, our 25300 capital budgeting assignment help experts

Keep in mind these pointers while writing your assignment

Every assignment is involved with some learning outcomes and objectives. Before you start hitting keys on the keyboard, make sure that you know what these objectives are.

This way you will be able to hit those areas of the assignment where very few can reach.

• Describe the types of financial decisions and the role of the financial manager
• Apply the concepts of time value of money and risk and return to financial decision making
• Describe and determine the value of financial instruments
• Analyse capital budgeting projects
• Evaluate capital structure and the factors influencing the optimal capital structure policy

Number of stores

The company actually owns 300 retail stores. Or is that 301? check the information from the investor presentation (IP18). See the value of planned CAPEX.

Expansion

The planned expansion is in Sydney suburb of Engadine. For that, the company has already performed data analysis.

It is revealed that the capital expenditure for the construction of a new store and the operating expenses are quite high. Seeing this deduction, the CAPEX and OPEX for the new store can be inferred.

Analysis

According to the case study’s requirements, the CFO has asked you to prepare the financial analysis of the Engadine store. You also need to search through the public documents so that necessary assumptions can be identified.

And beware, as you have to present this proposal to the Board of Directors (your professor) who must approve the proposal. In the question, it is mentioned that you must perform an analysis but the date is not mentioned. If the IP18 date is 27.08.18, then you must assume a date later for your analysis.

Cash flow

There are always one or more things that are responsible for the major cash outflow. Hence, you must identify the major cash outflow sources for your Engadine store. Remember, the directors will be answerable to the shareholders.

Your proposal must be confident enough to justify the investment in the new store. The major cash outflow will be the CAPEX for the Engadine store. They are the cost of the building and the cost for the fixtures and fittings.

Cost

The cost of building in Engadine is approximately $2.3 million as stated in the case study. Michael Hill has $7.2 million in cash. Out of this, they want to pay $1.6 million leaving the balance of $700,000. To build a new store, some redundant equipment mustbe sold. The capital cost of this equipment was $600,000 in 2016 and have a life of 10 years. Today, this equipment can fetch $130,000. Michael Hill wants to distribute this money as dividend among the shareholders.

Opening a cash position of $7.2 million is not in the Engadine project. After paying the building’s capital cost of $2.3 million, a financial debt of $700,000 remains. Since redundant equipment must be sold, the cash flow of transactions should be as per the store’s construction. These include -

• Loss from the sale that is deductible in the tax
• Decreased tax shield from depreciation
• Dividend distribution from the sale of equipment

Review cost

Michael Hill conducted a comprehensive brand review to understand the change in taste and preferences of the customers. The cost of the review was $375,000 and the management doesn’t know to classify it as a tax-deductible expense.

Though review cost is related to the activities studied in financial analysis, it is not included while conducting financial analysis. Why? Because it is a sunk cost.

Capital budgeting

The capital budgeting for the first revenue year will be 2020 since Michael Hill plans to build the new store in 2019. But let us not forget that the retail environment is extremely brutal. The Australian same-store sales growth rate stated in the Investor Presentation is evidence of the disappointment. You can assume that the revenue generated by the Engadine store in 2020 will be equal to the average revenue figure per store for 2018.

The revenue forecast will rise by 2% per annum after 2020. And this will be the effect of the brand review. Prepare a 5-year growth plan with Y1, Y2, Y3, Y4 and Y5 (2019 to 2023). This will go on till 2029 (10-year life, remember?).

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