Gwatipoma Hog Fattening Project

EEC calculated the amount of time involved the anticipation of its cost ($3 million). The timeline in recovering their cost of investment ($2 million) initially for the foundation of this investment any profit made in the future of this investment will be justified as a profit for the company. If EEC can anticipate a fast return on its investment it is a profitable wise decision in making the investment financial, it is considered to be an easier way of formulating investments financially. On the basis of one year all cash flows is added together equal to the sum of $2 million originally invested, then it is divided by the annual cash flow of $500,000. The calculation of the payback period would equal four years. After this time frame any financial proceeds will be considered profitable for the company. I conclude that the timeframe is adequate in comparison of the investment in this worthwhile investment financial venture for the company.

will come to market in January 2003) currently have an average carrying cost of $10/cwt, which is expected to increase to $38/cwt at maturity. The futures prices, at September 30, 2002, for lean hogs/cwt are as follows: October 2002 ……………………………$29 November 2002 …………………………$30 December 2002 ………………………… $33 January 2003 …………………………… $37 February 2003 …………………………...$42 March 2003 ……………………………...$45 Despite the fact that current spot market prices for lean hogs are below the Company’s cost, management has indicated that, based on current spot market prices for the various products, they expect to recover all production costs of the entire hog inventory on hand (i.e., live hogs and developing hogs to be internally processed and sold to third parties) at September 30, 2002. In other words, total revenues for the pork products and total revenues for the sale of the live hogs to third parties, based on current spot prices, will exceed the sum of the current capitalized

You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,000,000.

A means of population control was needed for places where feral hogs are widespread. In recent years feral hog hunting has seen its popularity rise for this very reason and is indorsed by wildlife agencies as a means of population

The primary purpose of the scorecard is to help measure the financial perspective of the project. This will help measure reflecting financial performance, for example number of debtors, cash flow or return on investment, Net Present Value (NPV) and Internal Rate of Return (IRR). Several different procedures are available to analyze potential business investments. First, the most important concept of evaluating these investments is the NPV. NPV of a project can be viewed as the difference between an investment 's market value and the cost of that investment. It is only a good investment if it makes money for the company, so a positive NPV will be needed. The projects can be ranked

With this formula we can also calculate the time and the amount of money the capital invested in the project will have generate profits.

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.

The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

4. Based on the information provided in the case, our group calculated the NPV for the project under both tax environment and tax-free condition, respectively, by using the excel spreadsheet and the NPV function. (For a detailed calculation of NPV, please refer to Appendix Under 15-yr.) According to our calculation, we have the following results: In the first case scenario, which the firm is in a tax environment (35% income tax), the NPV of the project equals to -$6,366,054.53

5. The project is assumed to end in year 4. Do you think that this is realistic? Can you estimate the value of the project’s operating cash flows beyond year 4? State any assumptions you made.

Overall, the ranking lists shown that the project of Strategic Acquisition should be accept by the board directors, because it has a highest IRR and NPV, the second high Profitability Index and 5 years payback, although the initial investment is really big but still the return is worse to do. The total investment of this project will be EUR55 million. The second recommend project will be the project of Southward Expansion. This project has a high IRR and NPV, the initial investment is EUR30 million, it is the 3rd in the ranking list of Project Spending and it is the 2nd in the ranking list of Project Net Cash Flow about EUR56.25 million, The payback is 5 years too. Because the project of Effuent-Water Treatment at Four Plants is highly recommend so right now we have total capital budget EUR91 million. Based on all the ranking list, the project of the Artificial Sweetener will be the last recommendation for the new year capital budget. This project has the 3rd highest IRR and NPV, the return is the 4th in the list about EUR42.75 million and payback is also 5 years. They expenditure for this project is EUR27 million. So the total budget will be EUR118 million include Strategic Acquisition, Southward Expansion, Artificial Sweetener and Effuent-Water Treatment at Four Plants.

If we look at the financial summary of M.L.I we can calculate how much Winkler can bid for this company. We can calculate Net Present Value, Indicial Rate of Return and Payback period for this project. If we take last year and estimated after tax Income as a projection and investment of $2 million we can calculate:

The proposal seems to be an attractive one due to the fact that there seems to be a need in the district for this particular district to have the ability to perform some preproduction processing which is beneficial to local customers. The investment seems to be within company parameters and sounds attractive.

The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).