ACC511 Managerial Finance Learning

Question:

Q1) Dell is considering setting-up a new laptop manufacturing plant. The plant requires an initial investment of $500 million. The equipment will depreciate at the rate of 10% per annum on diminishing value basis.

a) What are the yearly depreciation expenses? That is, make a table which shows the depreciation expenses every year.

b) What are the yearly cash flows associated with the plant from year 1 to year 9? That is, make a table in which every step in the calculation of cash-flows is shown.

c) What are the cash-flows in year-0?

d) What are the terminal or year-10 cash flows?

e) Calculate the NPV of the project? Interpret the result.

f) Calculate the IRR and payback period? Provide an interpretation.

g) Suppose you talk to Dell’s CFO and he says, “We apply the same discount rate to all projects in a category. We do not adjust for project specific risks.” Does this approach make sense in view of what you have learned in this course?

Q2) Suppose you have analysed the project explained in Q1 and have submitted your report to the Chief Financial Officer (CFO) at Dell. When you arrived at work on Friday morning, you found the following memo on your desk addressed to you: