This task requires learners to research the topics of investment appraisal techniques, working capital and sources of finance, and then apply the knowledge gained to the company “Pear Limited” based in Cork.
Learners will research different capital investment appraisal techniques and apply those techniques and elements to a scenario provided. Learners will include in their report an analysis of both discounted and non-discounted techniques of capital investment appraisal. Learners will be required to create and demonstrate models of capital investment appraisal techniques.
Spreadsheet software may be used.
Critique sources of finance highlighting the source or sources of finance most appropriate for a company like Pear Limited
Discuss the importance of ensuring effective working capital management during the company’s capital investment program, detailing what specific measures could be taken by Pear Limited
Using work completed in Part I – Part III, prepare a report for management summarising recommendations and conclusions.
Investment Appraisal, Sources of Finance & Working Capital Pear Limited designs and creates portable music playing devices, laptops and desktop computers, operating systems, and mobile phones. The company first established operations in Ireland in 1980. The company is based in Cork and currently employs over 5,000 people as a result of a 25% increase in the workforce since 2015. CEO of Pear Limited Frank Downes describes this office as their most diverse, with employees coming from more than 80 countries. It was announced in January 2020 that Pear Limited would construct a new building at the Hollyhill site and would provide a further 1,000 jobs. Pear Limited’s senior management have asked their financial manager to consider in April 2020 whether they should proceed or not with this facility at the current time.
The financial manager has presented to you, his/her financial assistant, with the following information and wishes that a project appraisal be performed so as to help the decision as regards proceeding or not with the building of the facility.
1. A specialized technology architect company that specializes in designing these types of facilities has been hired to design the building. The company is to be paid €1,550,000 payable in three tranches, 30% now, 50% in one year’s time, and the balance in two years.
2. Planning permission will have to be given to Pear Limited Ireland by Cork County Council. Pear Limited has estimated that this planning permission process will cost them €115,500 in year 1. An environmental impact study will have to be conducted and paid at the same time as part of the planning permission application which will amount to €141,750.
3. The production facility build will consist of five main aspects;
a. 2,475 tonnes of steel. Steel currently can be purchased at €1,350 per tonne. Steel prices are expected to increase by 5% every six months starting on 1 July 2020. Pear Limited expects to commence construction on 1 January 2021. They estimate that 60% (50% in 1st Half, 10% in 2nd Half) of the steel will be used by 31 December 2021, with the balance required in quarter one of 2022.
b. Insulated wall and roof panels. The wall panels come in 20-meter lengths x 4 meters width. The proposed production facility will be 50 meters high. The two long walls will each be 1,500 meters long whereas both ends will be 750 meters respectively. Both ends will only require panels to cover 60% of the length due to specialized doors needed for access. The price quoted to Pear Limited is €950 per panel. The company quoted will provide a 5% discount on quoted prices but they have recommended that Pear Limited order 2% more panels than is required to cover any unforeseen circumstances. The roof panels will cost €450 per panel and these come in the same dimensions as the wall panels. 30% of wall panels and 10% of roof panels will be used and paid for in 2021 with the balances being paid the following year.
c. Specialized access doors costing US$472,500 each. The exchange rate when the doors will be purchased and paid for in 2022 is projected at €1:$1.25.
d. Lighting. The lighting will consist of 6,000 lights. 30% of these will cost €450 each with the remainder costing 40% more. These will be installed and paid in year two of the project. An electrical contractor has successfully tendered a price to install the lights based on 18 electricians working 9 hours a day for 105 days. The average cost per hour of 70% of the electricians will be €51 an hour. The balance of the workforce costs €78 an hour.
e. Specialized equipment to cater for technological testing and analysis will cost €2.5 million. 30% deposit is required in 2022 with 25% paid in the first half of the following year and the balance payable in the second six months of that year.
4. Staff will be hired to work in the new building. 75 staff will be required in total starting in 2021. 15 of these will transfer from existing buildings in Pear Limited Ireland. These workers cost on average €54,250 a year. Pear Limited Ireland makes a pension contribution for these workers at a rate of 5% of their wages. 80% of the remaining workers will be employed at an hourly rate of €24.50 an hour for a thirty-nine-hour working week. Each of these new workers will work overtime of 15% above the normal 39 hours and will earn an overtime premium of 20% on their normal hourly rate. The remaining workers will be supervisors who will earn a salary of €1,750 a week. This salary will increase by 6% each year.
5. Road infrastructure around the new production facility will cost €900,000. One third is payable in year 1 and two thirds payable in year 2.
6. Ireland’s specialized technology market on 1 January 2021 is estimated at 292,500 contracts. Pear Limited Ireland’s market share at that time is expected to be 30%. Contracts are projected to increase by 15% for each of the next four years moderating to an increase of 10% from then on. The new production facility will allow Pear Limited Ireland to increase its market share to 45% of the overall IT market. This increase will be in equal increases over the first three years of trading in the new production facility. Pear Limited Ireland expects to commence operating from the new facility on 1 January 2023. Pear Limited is unsure as regards the exact price per contract to charge customers. Market research has indicated that 55% of customers will pay €330 per contract, 35% will pay €375 per contract with the remainder willing to pay €420 a contract.
7. Marketing and advertising spend will be 5% of the incremental sales revenue.
8. The project is to be examined over a seven-year period to 31 December 2026.
9. The normal return expected by Pear Limited when assessing similar types of projects is 12%