Finance 251 Financial Management Assignment Part 1 2025 | UoA

Instructions: 

• This is a Group assignment (Part 1) which also includes an Individual component (Part 2).
• You must form your groups (min 2, max 5 people per group.
• There are two outputs for this assignment - Part 1: a written business report (identified in Tasks 1 to 5) and Part 2: a written memorandum.
• Part 1 of this assignment is worth a maximum of 100 marks and contributes up to 20% of your overall mark for the course.
• A Marking Rubric is attached (on the penultimate page) that identifies how marks will be allocated for Part 1 of the assignment.
• Part 1: The word limit for the group report is 1,000 words, excluding tables, diagrams, etc. This word limit is a maximum, not a target. The due date for this report is 11.59 pm on Monday, 10th February 2025. You must submit your completed assignment on or before this date. 
• Late Submissions: Any assignment that is submitted late will be subject to a penalty, equivalent to 10% of the total marks available for the assignment, per day or part thereof. No late assignments will be accepted after 11.59 pm on Wednesday, 12th February 2025. 
• You are required to present some of your answers using Excel. Please refer to Getting Started in Excel for guidance on using Excel. 
• The final requirement in the assessment is to write a report to the Finance Director of Spark New Zealand Limited. Some marks will be awarded for the format of your answer. Please refer to Report Writing for guidance on report writing.
• Where a question requires calculations, you should clearly show these calculations. In the event of an answer being incorrect, partial marks may be awarded where workings are shown. 
• This is an assessment item, and no further assistance or information about this assignment will be provided by the FINANCE 251 teaching team.

CASE STUDY: Spark New Zealand Limited (NZE: SPK) 

Spark New Zealand Limited (Spark) is one of the leading telecommunications and digital services companies in New Zealand. The company's origins trace back to the late 19th century when New Zealand's telecommunications landscape was managed by the New Zealand Post Office, which handled postal, telegraph, and telephone services. 

In the early 1980s, New Zealand, like many other countries, recognised the need to modernise and privatise state-owned enterprises to improve efficiency and service quality. This was part of a broader trend of economic liberalisation. In 1987, the New Zealand Post Office was split into three separate state-owned enterprises: New Zealand Post Limited (postal services), PostBank (banking services), and Telecom Corporation of New Zealand Limited (Telecom), which took over the telecommunications operations. 

In 1990, the New Zealand government sold Telecom to two U.S.-based companies, Bell Atlantic and Ameritech, for NZD 4.25 billion. This sale marked the beginning of a new era for telecommunications in New Zealand, as Telecom became the dominant player in the market. During the 1990s, Telecom expanded its services and infrastructure. It was the primary provider of both fixed-line telephone services and, eventually, mobile communications in New Zealand. Telecom's monopoly over the telecommunications sector was evident, as it controlled the majority of the country's phone lines and infrastructure, leading to criticism over high prices and a lack of competition. 

In 2001, the Telecommunications Act was passed, which introduced the role of a Telecommunications Commissioner and paved the way for greater regulatory oversight. This act led to the unbundling of the local loop in 2006, allowing other service providers to access Telecom's copper network and offer their services directly to consumers. The unbundling process was a significant regulatory intervention that aimed to break Telecom's stranglehold on the market and encourage competition. The competition led to lower prices, better services, and innovation in the industry, benefiting consumers across New Zealand. 

In the face of increasing competition and evolving technology, Telecom New Zealand recognised the need to transform its business model. The company began shifting its focus from traditional fixed-line telephony to broadband, mobile, and digital services. This strategic pivot culminated in a significant rebranding effort. In 2014, Telecom New Zealand rebranded itself as Spark New Zealand Limited. The name change was more than just cosmetic; it signified a fundamental shift in the company's identity and direction. The new name, "Spark," was chosen to represent energy, innovation, and the company's commitment to igniting possibilities in the digital age. 

The rebranding was accompanied by a renewed focus on customer experience, digital services, and technological innovation. Spark invested heavily in expanding its mobile network, particularly in 4G and later 5G technologies. The company also began offering a range of digital services, including cloud computing, cybersecurity, and digital entertainment, positioning itself as more than just a telecommunications provider. 

Despite its successes, Spark has faced its share of challenges. The rapidly changing technological landscape has required the company to constantly adapt and innovate. The emergence of new technologies such as the Internet of Things (IoT), Artificial Intelligence (AI), and cloud computing has presented both opportunities and challenges for Spark. Moreover, competition in the telecommunications and digital services sector remains fierce. Spark has had to navigate competition from other telecommunications providers, as well as from global tech giants offering.

Many telecom companies offer data centre services to enterprise customers, including web hosting, cloud computing, and managed IT services. These services are supported by the same robust infrastructure used for the company's internal operations. Telecom data centres often serve as distribution points for content delivery networks (CDNs), enabling faster delivery of media content like videos, music, and games to end-users. This is crucial for supporting services like video streaming, online gaming, and other high-bandwidth applications. 

Your Role 

After your studies at the University of Auckland, you have been employed by Spark as part of its finance team, where you will be reporting directly to Stefan Knight. Mr. Knight is the Finance Director at Spark New Zealand Limited. He is a Chartered Accountant who began his career at Deloitte, working across both Audit and Corporate Finance and has a Bachelor of Commerce in Accounting and Finance from the University of Auckland. Mr. Knight reports directly to Jolie Hodson, the CEO and Executive Director of Spark. 

Your finance team will work closely with the Network and Operations team, and you have been liaising with colleagues from this area on the construction of a suite of data centres. Spark will generate revenue from its data centres by offering a broad array of services, from traditional colocation and hosting to advanced cloud, network, security, and managed services. By leveraging its extensive infrastructure, expertise, and market position, Spark believes it can generate significant revenue streams from its data centres while providing essential services to businesses across various industries. The first stage is the construction of a pair of identical "green" data centres in two different parts of the country for redundancy and disaster recovery. It's your job to determine the financial viability of this investment. 

You have gathered the following details to assist in your analysis:

Financial Information Tables:

Table 1 - Revenue Generation Estimates 

The market for colocation and hosting, advanced cloud, network, security, and managed services is growing exponentially, but initial estimates from the sales and marketing division suggest that total revenue from the first year of operation will be $ 140 million. 

Revenue growth is anticipated to be extremely high (30%) in the second year of operation, followed by growth rates of 25%, 20%, 15%, 10% and 5% in the years following. 

Table 2 - Investment cash-flows 

The initial investment in Property Plant and Equipment is expected to be $175,000,000, which consists of $50,000,000 for land and $125,000,000 for Plant and Equipment. A further $40,000,000 CAPEX for upgrades to Plant and Equipment is anticipated in Year 3 and Year 5. 

The data centres have an estimated life of seven years (the assumption is that by the end of this period, more advanced AI enhanced processes will be available that will supersede Spark's data centres) and all Plant and Equipment will be depreciated on a straight-line basis at 20% p.a. Land will not be depreciated. At the end of the seven-year investment period, it is assumed that the land could be sold at its original purchase price and that Plant and Equipment can be disposed of at its book value.

It is anticipated that the average annual balance of accounts receivable will be equivalent to 2½% % of annual sales revenue and that the average annual balance of accounts payable will be equivalent to 1½% % of annual sales revenue. 

Variable operating costs are expected to be 75% of revenue each year. 

Fixed operating costs (excluding depreciation) are expected to be $16,000,000 p.a. 

Table 3 - Economic and other data 

New Zealand company tax rate - 28% 
5-year fixed-rate borrowing rate for Spark New Zealand Limited - 7.00% p.a. 
The risk-free rate is currently 4.0% p.a. 
Due to recent market volatility, particularly in the tech-stock sector, the expected market return is currently around 11.0%. 

Table 4 - Simplifying Assumptions 

Although the construction of new data centres will take some time, the CAPEX cash flows for this initial investment should be recorded in Year 0 (and Years 3 and 5 for the upgrades). 
Revenue and expenses during the course of a year should be recorded at the end of that year. For example, revenues and expenses occurring during the first year of operation should be recorded in Year 1. 

Tax on profit in any year is payable in full at the end of that year.

Assignment Questions

• Prepare an Excel table showing the investment opportunity's cash flows over the seven years. (Display whole dollar amounts only.) (15 marks)
• Calculate the approximate Payback Period, the NPV and the IRR of the investment project. (10 marks)
• You are unsure of the reliability of some of your estimates and want to know how sensitive the project is to volatility in a number of areas. Select three variables that you consider are important to the decision and will have a significant impact on Spark's investment decision. Use your spreadsheet to conduct a sensitivity analysis on the project by separately changing each of these variables.
  (15 marks)
• Write a report to Stefan Knight the Finance Director at Spark New Zealand Limited, Evaluating the investment opportunity. Make sure to comment on the impact of your sensitivity analysis. Recommend whether it should or should not proceed and justify your recommendation. Your workings for Tasks 1 - 4 should appear as appendices to your report and your findings referred to in the report. (40 marks)