In this assignment, you will undertake a capital investment analysis, and describe and appraise capital structure/payout policies. The marking criteria and performance level standards are shown in the rubric at the end of this document.
Task 1: Capital Structure and Payout Policy Analysis
- Describe the company’s capital structure and payout policies based on annual historical data.
- Evaluate either the company’s capital structure or payout policy using factors to be considered in setting such policy as they apply to the company’s context. Your analysis will be mostly qualitative but some basic quantitative measures should be used in describing the company’s policies. Using well labelled graphs in your description is highly recommended (also saves on word count!)
Task 2: Capital Investment Analysis
This task is based on the case information below.
Hotels International Ltd (a fictional company) owns and operates two chains (set up as separate divisions) of three- and four-star hotels in Australian cities. The COVID-19 pandemic has led to a dramatic fall in demand. In planning for a new “COVID normal”, the board wants a thorough review of all equipment and processes to ensure best practice COVID safety measures are met.
A small group of the company’s managers (“the new normal team” or “NNT”) has been put together to develop a capital investment project in line with the board’s directive. The CEO has asked you to undertake a financial analysis of the project based on a five-year life and assuming no terminal value. You will provide your analysis in the form of a memo. NNT has provided you with the following information about the project.
Therefore, the project is not just an equipment upgrade (quickly and easily copied by competitors) but a complete package to support a competitive advantage for that chain in customer safety. If successful, the project could be replicated in its other chain.
Very recent research by a university PhD student suggests cleanliness and COVID safety measures top the list of the major factors now considered by Australian consumers in choosing accommodation and leisure facilities. Based on this country-wide research, the NNT has tentatively estimated that Project HVAC+ could increase existing forecast annual divisional sales revenue within current capacity constraints by $15 million in the project’s first year. In line with existing divisional revenue forecasts, this benefit is expected to grow by 2% per year (Australian economists’ consensus forecast inflation rate) in the remaining years of the project.
Analyse the project and prepare a memo to the CEO of Hotels International that summarises your key results and provides recommendations on the project. Note carefully the following points:
- Analyse base case (expected) cash flows and their potential uncertainty.
- For your base case analysis, calculate the five investment decision criteria focused upon in the Week 4 PERCI content.
- If you make any assumptions beyond those given in the case information, briefly explain them (this can be in the appendix with your base case cash flows – see second last dot point below).
- Recommendations should address the decision suggested by your base case, along with further follow up or other matters that the company should consider prior to making a final decision. These additional recommendations should be based on an aspect of your analysis and/or the case information.
- Include an appendix to the memo that provides a clear screenshot(s) or table of your base case cash flows, the purpose of which is to allow the CEO (your marker) to see line item detail if needed.
- Within the memo body, you are advised to use tables and/or figures to assist decision makers in quickly seeing main points and to visualise your analysis results. However, ensure the key point(s) of each table or figure is self-evident, discussed or explained.
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