INTRODUCTION TO APPLIED FINANCE

PLEASE READ THE STUDY GUIDE week 1 – 5 FOR FORMULAS AND ALL INSTRUCTIONS.

Assessment Brief:
Your client has recently retired and has received a superannuation payout of $750,000 earned from an illustrious career in Marketing, received in a lump sum. Your client would like to help provide for their grand children’s future and therefore has decided to invest the lot. Your client has identified three investment options that they are interested in and want your professional advice as a finance expert on which investment you believe they should choose.
Option 1: involves placing the $750,000 into a Community Bank Online Saver account at that is guaranteed to return $75,000 at the end of each year for 10 years (starting at the end of the first year) after which time the client would then get their $750,000 back.
Option 2: involves investing the total of $750,000 to buy 3 small 1 bedroom units. Each unit will then be rented out for $30,000 a year with the rent received at the end of the year commencing at the end of year 1. The rent is guaranteed as the apartments are rented out to

the Army and they have signed a rental contract for ten years. After the ten years the Army has agreed via a signed contract to buy the units for a total of $1,000,000 in cash.
Option 3: involves investing in a brand new scheme whereby the client would be required to invest the total of $750,000 into an orange juice business, $250,000 upfront to plant the oranges and set up the juice factory, and then $50,000 a year for 10 years for picking the oranges and juice factory maintenance. The juice factory will not generate any orange juice for the first two years. At the end of the third year the juice factory is expected to generate $20,000 of orange juice and will increase production by $30,000 per year. Ten years after the oranges are planted they cease yielding a commercial quantity of juice and the juice factory is sold to a neighbouring farmer for $100,000 in cash.
You have perused a number of other potential investment opportunities and in identifying these investment opportunities you have decided that your client’s minimum required rate of return that the chosen investment will need to generate is 12% per annum.
You are required to write a 1000 word report for your client that covers the following:
– An introduction to the report;
– A discussion, analysis and ranking of each investment using Net Present Value ?(NPV), Internal Rate of Return (IRR) and the Payback Period (PP);
– A discussion overall which investment should be chosen (i.e. what is the best ?investment for the client to choose and why)
– A discussion of the risks involved in each investment;
– A discussion of the limitations of using the NPV, IRR and the PP to evaluate ?investments;
– A conclusion to the report;
– An appendix to your report that includes the calculations for the NPV, IRR and PP for ?Investment 1, 2 and 3.

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