25742 Case Study Spring 2015-2

Case StudyFinancial ManagementSpring Semester 2015Due: 5pm Monday 12 October, 2015All Over Fitness LimitedAll Over Fitness Limited (AOF) are providers of fitness equipment for gymnasiums and fitness organisations in Sydney. They are analysing whether to start up an office in Melbourne to try and break into the market down there. Fitness is an expanding industry all over the world and they believe it is only going to continue to increase. They believe that, as the population ages, more people will be joining fitness clubs to keep fit in their retirement. They also see the increase in the number of sedentary jobs, and more people living in apartments, as reasons for more people to join these clubs and gymnasiums. However the costs will be quite large for the company as it will require a great deal of new equipment and a new warehouse/factory in Melbourne. So it is important for them to determine if the increased sales anticipated will make the project viable. The company spent $230,000 on research into the Melbourne market, this information assisted them in determining the revenues in Melbourne and lost revenues in Sydney. It is your job, as the financial advisors to AOF, to undertake the analysis and make a recommendation on the viability of the expansion.The existing equipment in Sydney can be used for the production of most of the equipment that will be supplied in Melbourne. This equipment will be transported to Melbourne by train. Costs for this are anticipated to be $120,000 p.a. for the life of the project, this includes the insurance required. However some of the equipment will be manufactured in Melbourne and will require new machinery there. This new production machinery is likely to have an economic life of ten years, although the accountant at AOF believes it may well be still in good working order in 15 years. With this in mind she will depreciate it over the full 10 years to dissipate these expenses over a long period. It would cost AOF $10,000,000 to purchase the machinery and a further $80,000 in installation costs. The installation costs will simply add to the initial cost of the machinery. The tax allowable depreciation rate for this type of machinery hasn’t changed over the last 20 years, it is straight line down to zero value over 5 years. The new machine is expected to have a salvage value of $850,000 at the end of the projects’ economic life in year 10.Three of the new staff in Melbourne will be on the manufacturing process and three on the sales and administration. Training will be required for the staff using the new manufacturing equipment and the cost is estimated to be $15,000 per person. This expense is tax deductible in the year it occurs. The training must be completed when the machinery is purchased. Salaries for manufacturing staff are $75,000 each, $60,000 for the two administrative staff and $80,000 for the only sales person. These salaries will remain constant for the purposes of this analysis.It is anticipated that if they open the business in Melbourne that it will overlap to some extent with sales they currently make in Sydney. The sales department believe the reduced sales in Sydney will amount to around $1,250,000 p.a. for the life of the project. They will also require additional working capital during the project life which will be 5% of the following year’s revenue increases. The working capital requirements will not be affected by the reduced sales in Sydney.Additional cost and revenue changes are included in the following table:AOF have been to see their bank, Ultimo Bank Limited, who have agreed to lend them $10,000,000 for the purchase of the machinery. They will charge them 7% p.a. interest on the loan which is a competitive rate given the risk of the fitness industry and the loan will be over 15 years. They will pay $1,097,946.25 p.a. in principal and interest.AOF is currently listed on the Australian Stock Exchange and trades with an industry average beta of 0.825. The taxation rate for the company has been 30% for the last 5 years and it expects this to be maintained. The current risk free rate is 4.5% p.a. with the market trading at a 7% p.a. premium. The dollar estimates given in this analysis are all in 2015 dollar figures. This project is considered to have the same risk level as the firm as a whole which is 100% financed by equity.You are required to submit the following;1.An executive summary making a firm recommendation to accept or reject theproject. The executive summary must contain concise reasons for your recommendation and a summary of your financial analysis. The report should be a maximum of two A4 pages (single space 12 font). ( 6 marks)2.Readable spread sheets clearly showing the NPV of the project and all othercalculations that are used to support your decisions, including any additional analysis to account for uncertainty of projections. (14 marks)The report must be submitted in hard copy. Email submission is not permitted. Case studies may be handed in during your lecture in the week commencing 5 October or in the box marked ‘FINANCE 2’ in the student lounge on level 5 in Building 8 (in front of the blue pods), UTS by 5pm Monday, 12 October, 2015. Please ensure you put the attached cover sheet on your assignment, only one case study per group is to be handed in. Any questions regarding the case study should be put in the Case Study Forum of the Discussion Board on the UTS Online site. Good Luck.Photocopy this cover and attach it to the front of your submission for this subject.UTS: Business SchoolFinance Discipline Group25742 Financial ManagementCase Study Spring Semester 2015Due: In your lecture during the week commencing 05/10/15 or by 5pm Monday, 12/10/15 in the box marked ‘FINANCE 2’ in the student lounge on level 5 in Building 8 (in front of the blue pods), UTS.。