TNA should consider very little of its physical investment being funded by external equity. The Australian companies have not raised any equity on average since 2003. There has been a higher propensity in investing cash flows in physical investment compared to the nonrecourse companies. The Australian resource companies like TNA have generated cash flow payout ratio that is measurable as dividend plus buybacks relative to the operations of cash flows. The Australian resource companies, like TNA, have been issuing equity to the tune of $25 billion net. However, most of the equity has been issued to reduce debt levels.

The equity funding that is low and the return on capital to the shareholders have been reflecting the high percentage of highly profitable companies based out of Australia that makes up the industry. However, in case of smaller companies without having established operations have a retort to engage themselves in the exploration activities. These companies have been producing very little internal funding (Williams 2012). However, under the assumption that TNA is a large company, it has access to the debt financing with lower risk with respect to the lacking of cash flow and debt servicing.  

TNA must be cautious about the gearing of the sector that can be low. This is because it is especially true, if the TNA funds mostly from the internal sources. This is also significant as the Australian resource sector had reached rock bottom at 24 percent in 2010. This figure has risen on the strength of being physically invested the funds with the issuance of bonds. The reason of the low book value gearing ratio is the generating of internal funds in excess of the requirement of physical investment and thus having little reason to raising debt (Rayner and Bishop 2013).

The external funding, such as, new debt and equity has financed only a little over 10 percent of the Australian resource boom. Most of the external funding emanates from the debt, especially from the bond markets. The role of the banks has been very limited to, fund resource investment. The TNA’s possible raisings of the equity has been aimed to strengthen the balance sheets after the acquisition made of large debt funds rather than new physical investment fundings (Debelle 2011).  

TNA can consider sourcing funds extensively from the overseas. This is a genuine option for TNA as almost half of the physical investment by the Australian companies have been funded from the foreign countries. The foreign countries is meant by foreign based entities. Nonetheless, genuine usage of the foreign fund sources has been much higher than that. That is because the TNA has the option of raising primarily through debt funding by the issuance of bonds in the overseas market, especially the United States.  

If TNA has partial foreign ownership, even the internal sources funding can be termed as the equivalent to the foreign sources partial funding. There is every chance that TNA is partially foreign owned as three-quarters of the Australian listed resource sector is owned by the foreign entities. These factors points towards sourcing of physical investments from the offshore to the tune of being around four-fifth of the funding (Somanath 2011).  

Capital Budgeting Evaluation

Determination of Exchange rates

The two countries viz. Australia and Vietnam when considered in terms of exchange rates between the currencies is being determined by the differential between the countries. As a rule of thumb, the country having the lower inflation rate shows a value representing higher currency than the country represented by a higher rate of inflation whose value of currency tend exhibiting relative depreciation with respect to the value (Somanath 2011). It is very important that there is a direct proportion between exchange rate and the differential inflation rate. In the case of this paper, the differential inflation between Australia and Vietnam has been fluctuating at the rates gives as 4%, 3%, 3%, 2%, and 2% in the years 1, 2, 3, 4, and 5 respectively. The current exchange rate is 19.74 Vietnamese Dong (VD) per Australian Dollar ($A) is likely to be increasing, according to the differential inflation rate increase in the years provided. Therefore, the exchange rates will be figured out at 20.53, 20.33, 20.33, 20.13 and 20.13 Vietnamese Dong per Australian Dollar representing the years of 1, 2, 3, 4 and 5 respectively rounded to two decimal places.

Calculating Annual Exchange Rates Considering Differential Inflation

Determination of Annual Revenue and Net Income

The Vietnamese firm generates revenue of $A 200,000 per month. This means it has an annual revenue of $A 2,400,000. By considering the current exchange rate of 19.74, makes it to VD 47,376,000. The revenue growth estimated is 20%, 30%, 30%, 20% and 10% in years 1, 2, 3, 4, and 5 respectively. The use of the exchange rate with regards to the respective years, the revenue estimated is calculated as VD 59,122,253, 76,119,900, 98,955,871, 117,594,161 and 129,353,577 in years 1, 2, 3, 4 and 5.

Calculating Annual Revenue in VD Considering Estimated Revenue Growth Rates

Under the assumption that the date of investment is July 1, 2014, the first year terminates on June 30, 2015. Similarly, the second year terminates on June 30, 2016 and it continues the same way till June 30, 2019 that represents the fifth year. The estimated costs are 60% of the first year, and 50% for the rest of the year. The deduction of the costs is made to calculate the net profit as VD 23,648,901, 38,059,950, 49,477,935, 58,797,080 and 64,676,788 in years 1, 2, 3, 4 and 5.

Calculating Annual Profits

 Applying Capital Budget Evaluation Techniques

 The  evaluation techniques related to the capital budgeting are generally applicable in evaluating the financial viability of an investment proposed in the form of Net Present Value (NPV) and the Internal Rate Return (IRR).

The discount is provided by the NPV to the estimates of benefits accrued in the future from the capital investment proposed to their present equivalent with the usage of the formula X/(1+r)ⁿ. Here, the X represents cash flow for the year n, r is the minimum rate of return required that is meant to be Weighted Average Cost of Capital, n is year representing the expected benefit and 1 represents a constant. The not discounted initial investment is subtracted from the present value of all expected benefits. The difference that comes out, if found positive, the project is approved and otherwise rejected (Berges 2011). The case of this paper, the annual net income is represented by the expected future financial benefits with the residue value of $A 200,000 in the year 5 that can be translated to  VD 4,026,000 that has been used with year 5 exchange rate.

Using the formula X/(1+r)n and being discounted, the present value representing the annual revenues of VD 21,499,001, 31,454,504, 37,173,505, 40,159,197 and 40,159,197 for years 1, 2, 3, 4 and 5. The sum of all future benefits of the present value is  VD 172,945,234.

Calculating Present Values of all Future Annual Profits

Total Net Present Values of total future benefits = 172,945,234.

The table above shows the initial capital outlay required is VD 197,400,000. The current exchange rate of 19.74 has to be deducted from this value. The resultant figure comes out to be negative 24,454,766. This implies that the project is not viable to make profits and TNA should refrain from acquiring the Vietnamese company.

Calculating Net Present Value at a Price of $A 10,000,000

The table below shows the reduction of price to $A 7,000,000 that can be calculated in VD as 138,180, 000 by the current exchange rate. Thus, the NPV becomes VD 172,945,234 minus 138,180,000. A positive figure is obtained at 34,765,234 that implies a positive NPV meaning the TNA should be acquiring the company.

Calculating Net Present Value at a Price of $A 7,000,000

Internal Rate of Return (IRR)

The IRR indicates the discounting rate discounting future cash flows that are largely equivalent to the capital outlay, fixed initially and therefore equate the NPV to zero. The decision criteria uses the IIR to compare it with the required rate of return. In this paper the project is rejected if the Weighted Average Cost of Capital is less. In the same way, the project is approved if it is greater (Graham & Smart 2011). In this paper and the case that is analyzed, the rate of return is benchmarked with Weighted Average Cost of Capital of 10%. This figure must be exceeded by the rate of return from any investment to be considered as a viable project. The trial and error are practiced that found the discount rate, reducing the NPV negligibly with a value of 16 that is found to be 5.7178%. Therefore, the IRR is about 5.7178%, being lower than 10%.  

Calculating Internal Rate of Return at a Price of $A 10,000,000

The proposed investment of $A 10 million must be rejected. However, if the investment is curtailed to $A 7 million that is equal to VD 138,180,000 at the current exchange rate, the NPV is reduced by the discounting rate negligibly with a value of 17 is 17.91009%. Thus the approximate IRR is shown in the table below. The IRR, at this price, is greater than the WACC of 10%. Therefore, TNA should accept the project with the Vietnamese company.

Calculating Internal Rate of Return at a Price of $A 7,000,000

Conclusion

There is a range of sources of funds that TNA can tap in generating funds to acquire the Vietnamese company. The TNA should be looking for the debt that it holds and provide restrictions on equity shares. It can tap the financial institutions in terms of debt instruments, such as bonds or offering new shares to the public. The TNA should reject the proposal of purchasing the Vietnamese company with an investment of $A 10 million. However, it is likely that TNA will make profits if it acquires with an investment of $A 7 million.