Atlantic Aquaculture

2088 Words Nov 16th, 2012 9 Pages
Atlantic Aquaculture, Inc.
Capital Budgeting with Staged Entry

Question 1
A – Even though Atlantic Aquaculture already bought the land needed for 300,000 USD, its value today is 900,000 USD. We can therefore conclude the 900,000 USD is an opportunity cost as the land can be sold at this value.

B – In this case it is best for the company to use the option to the land acquisition. By calculating the NPV the option is worth $-852,093.66. Buying the land without the option would bring the company back to $-900,000.00. We used a discount rate of 6%, as this is linked with the appreciation of the land annually. The calculation of the NPV can be found in Appendix A.

Question 2
A – The R&D cash flows are $48,000 annually for the
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B – As this is not possible to trace back from the information we can retrieve from the case. As the decision to expand or not to expand lies at the responsibility of the managers at the firm, probabilities are not able to be calculated here. However, the manager will always choose the option with the higher NPV.

Question 6
As can be seen from the given data, in terms of expected Net Present Values, the large plant seems to have a big advantage over the smaller project with NPVs of $9,028,000 and $8,062,000 respectively. On the risk side however the standard deviation of the small project is almost half of the large project. It is important to mention at this point that building a new plant appears riskier. In accordance to that one should use a risk adjustment incorporated in the cost of capital which should be higher that the discount rate of the small project.

Question 7
As the risk coefficient of the large project is 1.15 and it is known that most projects of Atlantic lie between 0.5 and 0.7 the large project is considered to be a lot more risky compared to the small project which has a risk coefficient of just 0.65.

Question 8

The reassessment of possibilities has the consequence that standard deviation, covariance and NPV change as well.

Lrge Plant | D=60% G=50% | D=75% G= 80% | D=90% G=90% | Small Plant | D=60% G= 50% | D=75% G=80% | D=90% G=90% | E(NPV) | 3327,95 | 9028,20 | 13459,36 | E(NPV) | 6314,35 | 8008,17 |

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