Agricultural Finance Byproduct Capital Budgeting Analysis
This homework will evaluate the expected returns from processing two alternative agricultural byproducts. You must work with a partner and complete the assignment in Excel; you and your partner are not allowed to consult with other groups. Each byproduct is assumed to have a 25-year lifespan. The NPV, IRR and MIRR techniques will be utilized for comparison of the two byproducts. Assume a 6 percent cost of capital when calculating the MIRR. In addition, break-even analysis must be performed on the appropriate year 4 ranges of manufacturing yields and prices received for each byproduct.
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Budgeted Revenue & Costs
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Byproduct
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X1
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X2
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Startup costs
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Year 1
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($3,369)
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($3,760)
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Year 2
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(1,246)
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(1,666)
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Year 3
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(1,317)
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(1,689)
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Year 4 Revenue
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Yield (tons)
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2.50
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4.00
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Price per ton
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$ 800
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$ 600
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Total revenue
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2,000
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2,400
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Operating costs
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Facility sanitation
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$ 164
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$ 184
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Labor
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209
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856
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Water & chemicals
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153
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105
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Machinery
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590
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140
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Miscellaneous
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169
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117
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Total operating costs
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1,285
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1,402
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Income above operating costs
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$ 715
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$ 998
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Assume annual revenue generation begins in year 4 and increases 4 percent per year through year 18, after which it decreases 4 percent per year. Annual operating costs also begin in year 4 and increase at a 1.5 percent rate of inflation per year through year 25.
Project Deliverables -
I. Printed material
A. The following tables must be part of the Excel file:
1. Table 1 - Byproduct cash flows (revenues, costs, NCFs)
2. Table 2 - NPV by discount rate, I RR and MIRR
3. Table 3 - Break-even yield (tons) by sales price
4. Table 4 - Break-even price (per ton) by yield.
B. Results and discussion
1. Discuss the results of Table 2. What do the numbers wed about the return assodated with the two byproduct options in rd ad on to the discount rate? Interpret the I RR and M I RR for the byproduct options. Explain how management will use these numbers.
2. How can the break-even analysis results be used by management?
3. Besides the numerical analysis results, what other factors merit consideration in this decision?
II. Electronic file - The uploaded file must have a name consisting of the partner's last names, followed by the text InvestAnalysis (e.g., LoneLevi_InvestAndysis.xls).*
Scoring Note: All printed and electronic deliverables must have a professional appearance free of spelling and grammatical errors.
Attachment:- Assignment File.rar