Assignment - Can choose any one project.
I - Agribusiness Investment Appraisal Case Study - Investment Project on Broiler Production Facility
Description of the Decision Problem
A property investor is considering establishing a greenfield broiler production facility near Dubbo.
The proposed development will require the purchase of 10 hectares of land and the construction of sheds; water and feed infrastructure. The proposed property has access to adequate water for the proposed venture.
The investor requires a financial analysis to assess the viability of the business.
Project Establishment and Capital Outlays
The 10 ha site can be purchased for $165,000 including purchase fees. Siteworks (levelling, pad formation, etc) will cost around $400,000.
Five sheds will be constructed to house 200,000 birds each. Each shed will have a dedicated feed and water system. The feed and water system for each shed will be linked to a central distribution hub but each can be isolated and operated independently if required. Each shed will cost $320,000 to build; while the feed and water infrastructure will cost $135,000 per shed. The central feed and water hub will cost a further $200,000.
A tractor with a bucket will be needed to clean the sheds, at a cost of $70,000.
Additional equipment (Dingo loader; misting machine; back-up feed cart; medication equipment; etc) will be required, at a cost of $105,000. There will also be a new 4WD utility required for the manager, at a cost of $40,000.
Working capital will be required, at a cost of 2% of outlays.
Asset Life, Depreciation and Resale Values
All items of plant and equipment can be assumed to have a life of 10 years. Depreciation on plant and equipment purchases can be claimed against taxable income at the rate of 20% per year for five years. The resale value for plant and equipment is expected to decline at a rate of 15% per year, diminishing balance method. Sheds may be depreciated at the rate of 20% per annum.
Project Operating Costs
It will be necessary to employ a manager and assistant to run the operation. The manager will be paid $90,000 per annum, while the assistant will receive $45,000 per annum. On-costs will add a further 20%.
Inghams will provide the birds, feed and any medications that are required. Birds will be delivered and collected by Inghams at no cost to the grower.
The grower is responsible for all other costs (power, water, R&M, rates, etc) as follows:
- Power $0.05 per bird
- Water $0.005 per bird
- R&M 2% of CAPEX
- Rates $2000 per year
- Sundry $0.02 per bird
- Insurance $2% of CAPEX.
Deaths average 1%.
Subsidies and Taxes
No government subsidies are available for the project. The company faces a flat tax rate of 30% on net taxable income.
Project Revenue
The grower expects to produce an average of 5 batches per year with each batch grown for around 8 weeks, during which they gain an average of 1.9kg bodyweight. The grower is paid a rate of $0.15/kg of weight gain.
Project Funding and Interest and Inflation Rates
The company will borrow the required funds for the project from a bank, as a long-term loan at an annual interest rate of 8.0%.
Equipment replacement and operating costs are expected to increase at the rate of increase in the Consumer Price Index, predicted to be 3% per year. However, the production price per kg is expected to increase by 'CPI + 1%', and the value of the land purchased is expected to increase at the annual rate of 'CPI + 3%'.
Tasks to be completed
(a) Set up a spreadsheet model for an investment appraisal of the proposed project.
(b) Using the spreadsheet, derive the project balances, net present value (NPV), internal rate of return (IRR) and payback period for the project. Draw a graph of the NPV profile and project balances. Interpret each of these six items.
(c) The live-weight price, average weight gain, power cost, deaths; and the number of batches are considered to be critical factors affecting the profitability of the investment. Carry out a sensitivity analysis of project NPV with respect to these factors, varying each parameter individually by plus and minus 20%, and interpret your findings.
(d) Using Goal Seek, determine the breakeven levels of each of the individual parameters listed in part (c), when all other parameters are held at their most likely levels.
(e) Formulate optimistic and pessimistic scenarios with respect to the parameters listed in part (c), and carry out a scenario analysis.
(f) Write a brief report for the company, explaining the findings of your analysis, including interpretation of estimated performance levels, tables and graphs obtained.
II - Agribusiness Investment Appraisal Case Study - Investment Project on Melon Production
Description of the Decision Problem
A group of businessmen from US are considering purchasing a property in far-north Queensland to produce melons, taking advantage of the early production window to achieve significantly higher returns than in other regions.
The property has been operating as a banana plantation but this has become virtually unviable due to the impact of the outbreak of Panama disease. The property is 300 hectares in area but only 100 hectares of this is suitable for melons.
The proposed purchase is on a Walk-In-Walk-Out basis with existing plant and equipment included.
The investor requires a high-level financial analysis to assess the viability of the proposal.
Project Establishment and Capital Outlays
The 300 ha property can be purchased for $5.5 million including all acquisition costs (stamp duty, etc). A second-hand tractor will be needed to assist with the development process, at a cost of $40,000. Other existing equipment - including tractors, trailers, and a forklift - can be used for the project without additional outlays - these equipment are valued at $150,000 dollars.
The project set-up costs will be around $500,000. The investors have also asked that a 5% contingency allowance be included in the analysis.
Asset Life, Depreciation and Resale Values
All items of machinery and equipment can be assumed to have a life of 10 years. Depreciation on machinery can be claimed against taxable income at the rate of 20% per year for five years. The resale value for machinery and plant is expected to decline at a rate of 15% per year, diminishing balance method.
Project Operating Costs
It will be necessary to employ one person - with qualifications and skills to operate machinery. The wage rate is $2000/week, plus 20% on-costs.
The project will produce watermelon and rockmelon in equal ratio. Operating costs as follows:
|
Watermelon ($/ha)
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Rockmelon ($/ha)
|
|
Seed
|
$1483
|
$1380
|
|
Planting
|
$2965
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$2965
|
|
Irrigation
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$150
|
$150
|
|
Miscellaneous
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$300
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$300
|
Harvest costs $400 per tonne for watermelons and $300 per tonne for rockmelons. Freight to market will cost $150 per tonne.
Other annual operating costs include insurance on machinery, at 2% of purchase price, and repairs and maintenance on plant and equipment at 5% of initial outlays.
Local government rates on the block are $1500 a year.
Working capital will be required, at a cost of 2% of operating outlays.
Subsidies and Taxes
No government subsidies are available for the project. The company faces a flat tax rate of 30% on net taxable income.
Project Revenue
Yields are expected to be 50 tonnes per hectare for watermelons and 40 tonnes per hectare for rockmelons. Each crop will be grown twice per year with harvest occurring in March and October. The average sale prices are expected to be as follows:
|
Watermelon ($/t)
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Rockmelon ($/t)
|
|
March
|
$390
|
$685
|
|
October
|
$625
|
$685
|
Project Funding and Interest and Inflation Rates
The investors have $1,500,000 of cash, currently returning 5% per annum, to contribute, and will borrow the balance of capital funds for the project from a bank, as a long-term loan at an annual interest rate of 7.1%.
Equipment replacement and operating costs are expected to increase at the rate of increase in the Consumer Price Index, predicted to be 3% per year. However, the sale price of fruit is expected to increase by 'CPI + 0.5%', and the value of the land purchased is expected to increase at the annual rate of 'CPI + 1%'.
Tasks to be completed
(a) Set up a spreadsheet model for an investment appraisal of the proposed project.
(b) Using the spreadsheet, derive the project balances, net present value (NPV), internal rate of return (IRR) and payback period for the project. Draw a graph of the NPV profile and project balances. Interpret each of these six items.
(c) The October watermelon price, Rockmelon Yield, Watermelon Harvest cost, and Rockmelon Freight Cost are considered to be critical factors affecting the profitability of the investment. Carry out a sensitivity analysis of project NPV with respect to these factors, varying each parameter individually by plus and minus 20%, and interpret your findings.
(d) Using Goal Seek, determine the breakeven levels of each of the individual parameters listed in part (c), when all other parameters are held at their most likely levels.
(e) Formulate optimistic and pessimistic scenarios with respect to the parameters listed in part (c), and carry out a scenario analysis.
(f) Write a brief report for the company, explaining the findings of your analysis, including interpretation of estimated performance levels, tables and graphs obtained.