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Why is it important for companies to consider ethics in their capital budgeting? Give an example of an ethical consideration in the capital-budgeting process. Limit your answer between 250 to 30

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Part A

Why is it important for companies to consider ethics in their capital budgeting? Give an example of an ethical consideration in the capital-budgeting process. Limit your answer between 250 to 300 words. (2 marks)
Part B

Medigard is an innovative international company that specialises in retractable safety medical devices for the global market. Established as Medisafe Instruments Pty Ltd in 1999, Medigard focused on leading the way in safety equipment. As a result of extensive research and development, Medigard brought innovative, world-leading medical devic...

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Question Preview:

Part A

Why is it important for companies to consider ethics in their capital budgeting? Give an example of an ethical consideration in the capital-budgeting process. Limit your answer between 250 to 300 words. (2 marks)
Part B

Medigard is an innovative international company that specialises in retractable safety medical devices for the global market. Established as Medisafe Instruments Pty Ltd in 1999, Medigard focused on leading the way in safety equipment. As a result of extensive research and development, Medigard brought innovative, world-leading medical devices to the market. 

In 2004, the Company listed on the ASX in 2004 as Medigard Limited (MGZ), raising $3.4 million capital. As an R&D company, Medigard sought to design and develop a suite of safety medical devices and associated products, instrumental in the medical industry for transforming the safety of disposable medical devices and associated equipment. Medigard products are simple in designs with minimal parts that enable inexpensive production.

i. Being a part of the treasury team of Medigard, your first exercise is to categorise Medigard’s capital structure into debt and equity capital. Begin by visiting the company’s website for 2016 financial report. http://www.medigard.com.au/investor-centre

ii. Calculate after-tax Weighted Average Cost of Capital. (2 marks)

iii. What alternative capital structure would you recommend to lower the cost of capital for the company? (3 marks) 

Guidelines:

• You are to calculate cost of debt and cost of equity capital to work out weighted average cost of capital based on 2016 company financials.

• To lower the cost of capital of the company, you are to suggest an alternative capital mix. 

Part C

In 2018 Bluegum Enterprise is considering the acquisition of a new cooling system for one of its plants. The system requires an initial outlay of $54,200 in Year 0 and have an expected life of five years. The cooling system is expected to reduce the firm’s overall costs by $20,608 at the end of each year over its five-year life. In addition to the $20,608 cash flow from operations during the fifth and final year, there will be an additional cash flow of $13,200 at the end of the fifth year associated with the salvage value of the system, making the cash flow in year 5 equal to $33,808.

Given a required return of 15%, calculate the following: 

(a) Payback period (1 mark)
(b) Discounted payback period (1 mark)
(c) Net present value (1 mark)
(d) Profitability index (1 mark)
(e) Internal rate of return (1 mark)
(f) Should this project be accepted? (1 mark)
(g) If the required rate of return is 20%, should this project be accepted? (2 marks) 

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Solution (A) Capital Budgeting refers to the process of allocation of an organization’s financial resources. There is no denial of the fact that capital expenditure is an
indispensable component for business growth and development. However, spending decision involve priorities and ethical values. A business organization clear about its
ethical approach and decision would approach capital budgeting process in a manner in which choices results in effective utilization

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