CORPORATE FINANCE
Problem Set 6
Question 1
For this question we need to download the financial statements of Coles Group LTD.
Download the annual income statement, balance sheet and cash flow statement for the last
fiscal year (ending 27 June 2021). One place to find the financial statements is on
[Link], search for the company (ticker code: COL) and click on Financials. Make sure
to get the annual financial statements, not the quarterly.
Coles is considering a new project. It is considering to develop its own budget house brand
LED lights bulbs. The supermarket expects that project will have a four-year life, after which a
new generation of bulbs is expected to come onto the market. The expected revenues from
this project will of course only be a fraction of the total revenues of the supermarket. The
company expects that the revenues of this project in the first year will be equal to 0.01% of
Coles total revenues over the last fiscal year. When customers have installed the light bulbs
at home they will last for many years, so once customers have bought the bulbs, they will not
come back to buy replacements. For that reason, the revenue from this project is expected to
decline by 5% each year. The operating costs of this project will be a same proportion of the
revenues as the company’s other projects, as can be found on the income statement over the
last fiscal year.
The project will require Coles to buy a new machine, at an investment equal to 0.02% of
the company’s current net property, plant and equipment (PPE). The machine will be
depreciated using the straight-line method over the life of the project to 0, although the salvage
value is expected to be 20% of the initial investment.
Before the start of the project the net working capital will have to be adjusted. After that,
net working capital will remain at the same level until the end of the project, when the NWC
will be re-adjusted to its original values before the start of the project. The inventory
requirements are expected to be 45% higher compared to the company’s other products,
which means that the inventory as a proportion of revenues for this project will be 45% higher
than the company average last year. The accounts payables requirements will be 33% lower
than Coles’ other projects, and the accounts receivable will be same as the other projects.
Coles’ tax rate can be determined by dividing its income taxes by its income before tax in the
previous fiscal year.
Determine the NPV and the IRR of the project, if the cost of capital for the firm is 4.9%.
Determine the free cash flow by setting up the timeline and computation of the free cash flow
in separate columns for each year of the project life. Be sure to make outflows negative and
inflows positive.
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