An investor is planning to establish a new business to grow and produce salmon in Tasmania. The development proposal is for 15 cages in open ocean for salmon production. The capital costs are all incurred at the start of the first year and are as follows: the purchase of the rights to farm salmon in the location from the government costs $5,000,000, total cost of cages $6,000,000 and cost of boats and harvesting equipment $12,000,000. You judge the cages to be capable of producing a gross income per cage of $350,000 starting in year 2 and onwards, but no income in the first year as the business needs to established (fish need to be sourced and stocked so no income in the first year). For the first year of operation your variable costs are $50,000 per cage as you establish the fish and then for all other years you expect the variable costs to be $150,000 per cage per year. You expect the annual overheads of running the salmon business would be $150,000 which will start immediately (in the first year). The initial capital investment of the right to farm will maintain its purchase value in real terms over the life of the project, however the cages are only worth 50% of their initial value at the end of 10 years. The cost of boats and harvesting equipment hold their value better and are still worth 80% of their initial value at the end of the 10 years. The required real rate of return of the investor is 8 per cent per annum. All figures shown are real terms, and are net of tax and stamp duty. Inflation is forecast at 2% per annum over the forecast period. Using a 10 year planning period, calculate the net present value (NPV) of this investment. Please show your workings and calculations in a table. Explain whether the proposed aquaculture business is a good investment idea or not for the investor.
An investor is planning to establish a new business to grow and produce salmon in Tasmania. The development proposal is for 15 cages in open ocean for salmon production. The capital costs are all incurred at the start of the first year and are as follows: the purchase of the rights to farm salmon in the location from the government costs $5,000,000, total cost of cages $6,000,000 and cost of boats and harvesting equipment $12,000,000. You judge the cages to be capable of producing a gross income per cage of $350,000 starting in year 2 and onwards, but no income in the first year as the business needs to established (fish need to be sourced and stocked so no income in the first year). For the first year of operation your variable costs are $50,000 per cage as you establish the fish and then for all other years you expect the variable costs to be $150,000 per cage per year. You expect the annual overheads of running the salmon business would be $150,000 which will start immediately (in the first year). The initial capital investment of the right to farm will maintain its purchase value in real terms over the life of the project, however the cages are only worth 50% of their initial value at the end of 10 years. The cost of boats and harvesting equipment hold their value better and are still worth 80% of their initial value at the end of the 10 years. The required real
Using a 10 year planning period, calculate the
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
