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Group Coursework

This coursework provides an opportunity to assess the viability of a major
project and perform break-even analysis using present value tools and Excel.
Please review carefully the lecture notes as well as the instructions below
before proceeding with your analysis. Clearly state any additional
assumptions you think may be necessary in your analysis of the problem and
reference any external source (which shouldn’t be necessary).

Summarize your responses in a report and attach an accompanying Excel
spreadsheet. The maximum number of words of the report together with the
spreadsheet is 3000. Your answers need to be succinct and to the point; your
grade will depend on the quality of the analysis and the clarity of the
report/spreadsheet rather than its length (longer is
not better).

IMPORTANT: please use the following convention to name your files:
(Assuming your team number is 123)

• Name the file of your report: “CF_CW1_TEAM_123_REPORT”

• Name the accompanying spreadsheet: “TEAM_123”

• Make sure to write the exact same names when you upload them to Moodle

Case Description

Anticipating a rising demand of clean fuel in the economy, Giant Shipbuilding
Co. considers developing a new type of LNG (liquefied natural gas) carriers,
which has a capacity of 170,000 cubic meters and can transport liquefied
natural gas from the US to Asia and Europe. Suppose now is the end of Year
0. The development takes 4 years to design and build a new shipyard and the
required equipment, which will be used to construct the new type of LNG
carriers starting from Year 5. Giant Shipbuilding Co. expects the shipyard and
the equipment to become obsolete after 10 years. That is, they become
worthless and can no longer be used to build ships from Year 15. During the
development process, Giant Shipbuilding Co. expects to spend $1.1 billion in
R&D expenditure, $1.2 billion in capital expenditure, and expects an increase
of $0.55 billion in its net working capital. See detailed information of the
R&D expenditure, capital expenditure, and net working capital in Table 1 of
the data file “LNG Coursework Data.xlsx”. The information about
depreciation is in Table 2 of the data file.

Giant Shipbuilding Co. expects to sell 6 vessels of the new type of LNG
carriers every year from Year 5 to Year 14. It estimates that in Year 5, the
price of the new type of LNG carrier will be $180 million per vessel and the
manufacturing costs will be $100 million per vessel. The new project’s
combined marketing and overhead cost in Year 5 is expected to be $90
million. This cost does not vary with the sales of the new LNG carriers.

Suppose it is reasonable to assume that the price and manufacturing costs per
vessel and the combined marketing and overhead cost keep growing at a rate
of 2% every year during the life of the shipyard.

The market risk of the new project is expected to be the same as that for other
lines of business of Giant Shipbuilding Co. Thus, it is reasonable to use the
company’s debt and equity to determine the weighted average cost of capital
for the new project. Table 3 in the data file shows the company’s current
market value balance sheet. The beta of the company’s equity is 1.68. The
debt has a credit rating of “A” from the three mainstream credit rating
agencies. Giant Shipbuilding Co. intends to maintain the net debt-equity ratio
for the foreseeable future, including any financing related to the new project.

The company faces a corporate tax rate of 35%. Assume that corporate taxes
are the only imperfection of the capital markets. Assume that the annual risk
free rate of return stays at 3% and the annual expected return of the market
portfolio stays at 9% during the life of the company’s new project.

To simplify the calculation in the following questions, assume that all cash
flows occur at the end of the corresponding years.

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