2. An initial investment of $160,000 is expected to generate annual cash inflow of $42,000 for 5 years. Depreciation is allowed on the straight line basis. It is

estimated that the project will generate scrap value of $10,000 at end of the 5th year. Calculate its accounting rate of return assuming that there are no other expenses on the project.

3. Company A is planning to undertake a project requiring initial investment of $30 million and is expected to generate $5 million in Year 1, $12 million in Year 2, $15 million in Year 3, $20 million in Year 4 and $25 million in Year 5.

Calculate the payback period of the project.

5. What is the internal rate of return (IRR)? How will you make the decision based on the results of IRR?

Assessment 2 Part B – Case Study

Evaluate Financial Risk

ABC Pty Ltd (ABC) is running a business to export the wood from Australia to its overseas customers. The company also has some local clients, but the majority (95%) of its client’s bases is from oversea. The overseas customers will pay US dollars for the products provided by ABC. The financial ratios used by the company for two years are shown as below.

Assume that ABC has a borrowing of $100,000 with Bank A with a variable interest rate, currently 5%. According to the recent market research and financial review, the industry experts expects that there may be an increase in the variable rate of interest in the short term.

You are the corporate risk manager, and required to write a REPORT to the director of ABC to include the following issues:

· Steps to assess and handle financial risk;

· The optimal capital structure that you will recommend, and advise how will you determine the company may be exposed to greater risk;

· Sources of funds that may be available to ABC;

· In order to minimize the risks, the company may develop risk management strategies that optimize mix of asset structures and liabilities in operations. Recommend four formal planning process and techniques that will be used to determine whether ABC’s long term investments are worth the funding of cash through the company’s capitalization structure.

· The possible financial risks that ABC may face, and extent of its financial risk exposure;

· The methods that you will use to measure the financial risks identified above;

· The methods that you will recommend to manage the financial risks identified above; and

· Key features of financial legislation relevant to financial risk and compliance.