SOLUTION: Melbourne Institute of Technology Fundamentals of Business Finance Questions

25300 Fundamentals of Business Finance – Assignment
# Assignment instructions
Please read the following information carefully:
1) Due date and time: 9am on Monday 5 October 2020.
2) Weight: 20% of total grade.
3) Teams:
• You can have an assignment team of:
o 1 student, which means you do the assignment by yourself.
OR,
o 2 to 8 students, which means you do the assignment in a group of students.
• Teams may consist of members from different tutorials.
• We encourage you to form teams consisting of 2 to 8 students as you will develop skills that
are important to your professional life, and your assignment submission is likely to be stronger
as it considers input from different students in your team.
• All team members receive the same assignment mark. Teaching staff are unable to award
team members different marks in the event a team has a ‘free-rider’. Therefore, you should
give considerable thought into selecting team members. In the event of a conflict within the
group, it your group’s responsibility to resolve the issue respectfully and maturely. In dire
situations please contact the subject coordinator. For more information on working in groups:
https://www.uts.edu.au/current-students/support/helps/self-help-resources/group-work
4) Preformatted blank excel spreadsheet:
• You must record your answers in the provided blank excel spreadsheet (available on UTS
Online). This spreadsheet is protected which means that only a restricted number of cells can
be used. All of your inputs into the spreadsheet should be using Arial font and size 8 text, this
ensures that your inputs are not converted to ######. Your answers will be converted to
###### if your cash flow/value is greater than 9,999,999,999 (Hint: none of your cash
flows/values for Q1-5 in your solution should be that large). The cells you cannot use are
coloured grey. This preformatted spreadsheet is designed in such a way to speed up the
marking process.
• For Q1 to 3 enter the cash flow description and the dollar amount in the appropriate cells.
Use whole dollars only and ignore cents. There are more rows than are required so if you’ve
used all of the rows then it means you’ve got too many cash flow items (also see additional
instructions on page 7 of this document). We want to be able to easily identify each cash flow.
Here is an example of how to report cash flows over the life of the project:


Q4 and Q5 can be answered using the vacant cells provided.
The student number and name of all group members must be entered into the relevant
section of the spreadsheet. You must also nominate one team member as the team leader
and supply their tutorial details in the corresponding fields of the spreadsheet.
1
25300 Fundamentals of Business Finance – Assignment
# Assignment instructions:
5) Submission:
• Please save your spreadsheet file with its original “.xlsx” extension. Do not save the
spreadsheet in any other format other than “.xlsx” as we are unable to open non-EXCEL file
extensions from UTS Online. Users of Apple’s Numbers spreadsheet or other programs – you
have been warned.
• You must submit your team’s answer spreadsheet using the “Assignment submission” feature
available under the Assignments folder on UTS Online. To submit, click on “Assignment
submission”, click on “Browse My Computer” to open and attach your spreadsheet and then
click the “Submit” button, that’s it! Check your gradebook (“Tools” -> “My Grades”) to verify
that your spreadsheet has been submitted correctly. The date and time will be displayed along
with an exclamation mark (!). If you have a padlock symbol it means you did not correctly
submit your spreadsheet, so please try again. This information only appears in the gradebook
of the student who submitted the spreadsheet. Please note we will only consider the first
electronic submission that you make, therefore, make sure it is your final submission.
6) Assignment queries:
• We will not answer queries about the assignment content in person or by email (email is
acceptable for only questions of personal/private nature).
• Assignment queries belong on UTS Online because everyone benefits from your question and
answer (whether the answer is given by us or another student). Please refer to the paragraph
number or question number in the assignment details below when asking a query on UTS
Online (to make it easier for you, a separate thread for each paragraph number and question
number has already been created in the Discussion Board on UTS Online). We will not provide
direct “yes/no” answers to your queries.
• Please read the existing posts on the discussion board before posting your query as it is likely
to have been answered already (especially when we approach the submission date). In
addition, please check the discussion board as we will clarify any perceived ambiguities in
the assignment questions. It is not a sufficient excuse to ex-post make a complaint about
the assignment because you have not been pro-active in seeking clarification via the
discussion board. Of course we greatly encourage your queries!
7) Penalties
• Late assignments incur a penalty of 25% per day (or part thereof) of the raw mark.
• You may also incur a penalty if you:
o Fail to submit your assignment using the preformatted spreadsheet available on UTS
Online.
o If your name appears on multiple assignment submissions.
o Or other illegitimate reason.
• Penalties do not apply if a special consideration application is made and subsequently
approved by the subject coordinator.
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25300 Fundamentals of Business Finance – Assignment
# Assignment instructions:
8) Statement on plagiarism:
• I refer you to the subject outline to make sure you are familiar with UTS’ statement on
plagiarism. In a nutshell, do not copy another team’s solutions and do not share your
assignment with another group.
• Please note that when you submit the assignment you are declaring that your assignment
submission is plagiarism-free. Please note that even if one member of the team demonstrates
plagiarism (without the knowledge of the other team members), this will lead to problems for
all team members. You do not want to be responsible for causing issues to your team
members.
• In previous semesters, teams were caught for plagiarism. All of these students did not think
they would be caught and they seriously regret their actions. The students from all of the
teams (guilty and non-guilty) are awaiting their results which is affecting their ability to enrol
in subsequent subjects. Some examples of penalties for plagiarism include: sanctions from
UTS, having to redo the subject, and fees incurred to retake the subject. I don’t want to come
across as the bad guy but you have been warned.
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25300 Fundamentals of Business Finance – Assignment
Assignment information:
Your team must answer the following five questions. Questions 1 to 4 require information relating
to the capital budgeting decision of United Cruises. Question 5 (detailed below on page 8) is
unrelated to Questions 1 to 4.
Capital Budgeting Information (17 Marks)
Present an itemised breakdown (and the total) for each of the following:
Q1. The Cash Flows at the start.
Q2. The Cash Flows over the life.
Q3. The Cash Flows at the end.
Q4. The NPV of the capital budgeting decision and a short explanation of your recommendation.
Congratulations, you were hired as a financial analyst for United Cruises following your studies at the
University of Technology Sydney. United Cruises is a cruise ship service provider in the Australasian
region. You fought off tough competition for the job, the recruitment team selected you for your
personable character, analytical mind, ability to solve problems, and experience of working well in
teams. You have really impressed senior management with your finance knowledge and ability to get
the job done. As a result, the Chief Executive Officer (CEO) Margot Robbie and Chief Financial
Officer (CFO) Rafael Nadal have asked you to perform a capital budgeting analysis of two new cruise
ships, the King Voyager and Queen Spirit. The capital budgeting decision is whether United Cruises
should purchase both cruise ships today in 2020 (Note: The decision is that United Cruises either buys
both cruise ships, or they do not buy any cruise ships at all). In order to conduct your analysis you will
need to collect information from different departments of the firm. Beyonce Drake from the accounting
department and Dwayne Johnson from the sales department have helped you obtain information from
various departments. The information that you have collected is detailed in the numbered paragraphs
below. It is your job as a financial analyst to decipher which information is relevant to the capital
budgeting analysis. Upon completion, you will present your analysis to Senior Management who will
approve/decline investment in the new cruise ships.
Information gathered from various departments:
1. United Cruises is a medium-sized Australian cruise experience provider. United Cruises will
purchase the King Voyager and Queen Spirit immediately. The cost of the
King Voyager is $45 million, and the Queen Spirit costs $42 million. The King Voyager will provide
a cruise experience from Sydney to South Island New Zealand. The Queen Spirit will provide a cruise
experience from Sydney to North Island New Zealand. The plan is to sell the King Voyager and Queen
Spirit in ten years’ time. The required rate of return for the King Voyager and Queen Spirit investment
project is 9%.
2. United Cruises will borrow $87 million from Macquarie Bank to fund the purchase of the King
Voyager and Queen Spirit cruise ships. Beyonce creates an amortisation schedule that indicates that
the yearly principal and interest repayments on the debt are $10 million.
3. United Cruises has been operating since 2010. The two existing cruise ships in the United Cruises
fleet include the Duke Magic and Princess Platinum. Both of these cruise ships were purchased five
years ago, and are being depreciated over a 25-year life. Margot wants the King Voyager and Queen
Spirit to be depreciated over a 35-year life because these new cruise ships are more modern and larger
than the existing cruise ships in the United Cruises fleet.
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25300 Fundamentals of Business Finance – Assignment
4. To navigate in and around the coast of New Zealand, both the King Voyager and the Queen Spirit
need to be fitted with a special propeller. For example, the special propeller allows the Queen Spirit to
navigate in and around the narrow ports in Auckland and Wellington. The special propeller allows the
King Voyager to navigate in and around Milford Sound (one of New Zealand’s most popular tourist
attractions). According to an email from Beyonce, United Cruises has two idle special propellers
currently stored in their Balmain premises. The two idle special propellers were purchased nine years
ago for $3 million each, both special propellers are compatible with either the King Voyager and Queen
Spirit cruise ships, and both propellers have been written off for tax purposes. Forecasts from the
accounting department indicate that each special propeller will be worthless 10 years from today.
According to the International Sea and Port Authority each special propeller currently has a market
value of $1,440,000. Hint: If an operating expense is incurred in Year 0, then you can record the tax
deduction in Year 0.
5. The King Voyager and Queen Spirit cruise ships will each require spare parts inventory of $2.50
million immediately, will each require operating inventory of $3 million immediately, and will each
incur maintenance expenses of $1.60 million per annum during the life of the project. The cost of
replenishing spare parts inventory and operating inventory is included in the annual $1.60 million
maintenance expenses incurred to operate each new cruise ship.
6. United Cruises total insurance yearly expenses is expected to increase by $3.22 million to $6 million
from the introduction of the King Voyager and the Queen Spirit. Based on forecasts, annual insurance
expenses relating to the King Voyager and Queen Spirit will increase by 0.5% every following year.
Hint: assume that all operating cash flows occur at the end of the year, unless specified otherwise.
7. United Cruises paid $55,000 to Boomerang Marketing Group for market research investigating the
demand for the new ships (i.e., King Voyager and Queen Spirit). The $55,000 fee was paid three
months ago. United Cruises received the market research report from Boomerang Marketing Group
two months ago. The report indicates that customers with the following characteristics are most
interested in the new cruises offered by United Cruises:
Age
35-65
Couples
Yes
Family with children
Yes
Salary before tax
$85,000
Popular reasons to visit New Zealand Milford Sound. Skiing. Queenstown.
Popular months to travel
December-February
Beyonce Drake suggests that the market research fee be included as an opportunity cost incurred in
Year 0 of the King Voyager and Queen Spirit investment decision.
8. To ensure that customers get the premium experience on the King Voyager and Queen Spirit, a
periodic $2.90 million “Premium Overhaul” per cruise ship is required every four years. The overhaul
will update the customer cabins with new beds, bathrooms, and electronic appliances. The first
“Premium Overhaul” for both cruise ships will occur at the end of Year 4.
9. Customers board all United Cruises at the Overseas Passenger Terminal in Circular Quay Sydney.
The King Voyager and Queen Spirit will together increase total annual port charges for United Cruises
from $1.45 million to $1.98 million. The port charges can be claimed as a tax deduction. The
introduction of the King Voyager and the Queen Spirit will increase the total yearly fuel expense for
United Cruises by $4.65 million to $7 million.
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25300 Fundamentals of Business Finance – Assignment
10. You receive a dossier which contains Table 1 (below) summarising relevant sales, food and drink
costs, and crew costs (this data controls for seasonal patterns):
Table 1
Duke Magic
Princess Platinum
King Voyager
Queen Spirit
Number of cruises
12
12
12
12
per year
Average crew salary
per member per
$45,000
$45,000
$50,000
$50,000
year
Number of crew
100
100
120
120
members per year
Food and drinks
45
45
50
50
tonnes per year
Average sales price
per customer per
$4,000
$4,000
$7,000
$5,000
cruise journey
Average number of
customers per cruise
500
500
600
600
journey
11. Using the information in Table 1 (above), the introduction of the two new cruise ships will result
in bulk buying discounts for United Cruises. Without the King Voyager and Queen Spirit, food drink
costs $32/kg for all cruise ships. With the King Voyager and Queen Spirit, food drink costs $28/kg for
all cruise ships.
12. Currently two new policies are being examined by the Australian Government. The first policy
supports climate change, and requires airline and cruise ship providers to pay a fee for contributing to
harmful emissions that have a negative impact on the environment. It is anticipated that the first policy
will be implemented in Year 2. United Cruises anticipates that the first policy will cost $0.35 million
per year per cruise ship. The second policy requires airline and cruise ship providers to have a
quarantine zone to protect customers from contagious viruses. United Cruises will have to hire an
external team to operate and implement the quarantine zone. It is anticipated that the second policy
will be implemented in Year 3. United Cruises forecasts that the second policy will cost a total of $0.05
million p.a. per cruise ship.
13. Six months ago, Rafael flew to New Zealand including Auckland, Wellington, and Christchurch
to meet with vendors regarding places for the King Voyager and Queen Spirit cruise ships to dock,
hotels for customer to stay at, and adventure/sports recreational activities for customers to undertake.
Rafael’s New Zealand flights, accommodation, local fares and meal expenses totalled $3,000.
14. The United Cruises call centre is located in Parramatta. Currently, United Cruises currently rents
the entire level eight of the Deloitte building for its call centre, with yearly call centre salary costs of
$40,000 (this is the total United Cruises call centre salary costs). It costs $190,000 p.a. to rent out any
one entire level in the Deloitte Building. To deal with additional customer support required for the
King Voyager and the Queen Spirit, United Cruises will also rent out the entire level nine of the Deloitte
building for its call centre activities and this will double its current total annual call centre salary costs.
15. In order to provide cruise ship services to customers, each cruise ship company must pay a one-off
fee of $10 million to the International Sea and Port Authority at the establishment of the cruise ship
company. No fee is required after the cruise ship company is established and operating. The fee allows
cruise ship companies to operate in domestic/international waters. All operating expenses are tax
deductible in the year the expense is incurred and the tax rate is 30%.
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25300 Fundamentals of Business Finance – Assignment
16. The total fixed costs for the King Voyager and Queen Spirit together are equal to $1.32 million per
annum. Last year, United Cruises total annual fixed costs (excluding headquarter costs) were $2.15
million. United Cruises headquarters is situated in Chifley Tower in Sydney. The total yearly
headquarter costs for United Cruises is equal to $2.99 million, and such costs are not expected to
change due to the introduction of the King Voyager and Queen Spirit. To save money, Margot wants
to allocate an equal share of the yearly headquarter costs for United Cruises across the King Voyager,
Queen Spirit, Duke Magic and Princess Platinum.
17. A significant increase in tourism in Australia is forecasted to occur. As a result, a competing cruise
ship company (Oceania Cruiseliners) will offer cruise ships journeys between Sydney and New
Zealand, starting in Year 9, for a five-year period. Whilst Oceania Cruiseliners is operating and while
the King Voyager and Queen Spirit are operating, United Cruises anticipates that cash sales for the
King Voyager will drop to 85% of the projected annual value, and cash sales for the Queen Spirit will
drop by $5 million p.a. (note: United Cruises operating expenses are expected to remain the same).
18. In 10 years’ time, the International Sea and Port Authority estimate that the market value of both
the King Voyager and Queen Spirit will be $18 million if the regular four-year “Premium Overhaul”
is not undertaken. However, if the regular four-year “Premium Overhaul” is undertaken, the King
Voyager will be worth $26 million, and the Queen Spirit will be worth $24 million. In either case, the
cruise ship propellers will have no value in 10 years’ time.
19. To boost awareness of the introduction of the King Voyager and Queen Spirit, United Cruises total
marketing expenses p.a. will increase from $2 million to $6 million during Year 1, Year 2 and Year 3.
As part of this initial marketing campaign, United Cruises will sponsor the Australian swimming and
rowing team at the 2021 Tokyo Olympic games, and the Socceroos at the 2022 World Cup in Qatar.
For the remainder of the project, marketing expenses directly relating to the King Voyager and Queen
Spirit together are equal to $2.20 million per annum.
20. The Australian Tax Office (ATO) issues the rule 2000/18 “Passenger ships”, which indicates that
the effective life of cruise ships like the Queen Spirit qualify for an effective life of 30 years. Through
a special ruling, the ATO has indicated that the King Voyager has an effective life of 32 years because
the King …
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