Atlantic Aquaculture

Atlantic Aquaculture, Inc. roofital 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 sight therefore conclude the 900,000 USD is an opportunity cost as the land can be sold at this value. B In this model it is best for the familiarity to use the natural selection to the land acquisition. By reason 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 appurtenance A. Question 2 A The R&D cash f clinical depressions atomic number 18 $48,000 annually for the eld 1998, 1999 and 2000. In 1996 we argon able to shield taxes with the appreciation. At a tax rate of 40% this result in a tax shield worth $144,000. B From the case is cognise that the salvage value testame nt altogether be taxed when the buildings are actually sold, as long as the assets value is half of the book value the sale will go done with. Take note that a 40% tax rate is used to calculate the tax shield. C The cash f lows are shown in the appendage B.Question 3 As can be seen in the Appendix C the crowing stomach, while taking into account a rwacc of 9% and the expectation that there will be full(prenominal) demand and high ripening opportunities for the firms products the sack Present comfort of the firm will be $17,140,000. 00. An Internal Rate of Return will be realized of 25. 83%. Further much the MIRR is calculated as 21. 54% and the payback period of the bear is 7. 05 years. Taking all early(a) situationors the same, when the firm is building a micro facility, the NPV would be $11,723,000. 00, the IRR 23. 39%, the MIRR 18. 5% and the period in which the be will be paid back 7. 18 years. Question 4 A In the Appendix the decision trees are shown and the fol lowing elements deserve attention. The nodes start with having high/low demand being 10,000 or 5,000 respectively. There is a 75% chance demand will be high, while 25% opportunity that demand will be low. The following pair of nodes, given differing probabilities (as can be seen in the Appendix) leads to the periodic cash flows. In de first years it is obvious that the cash flows are negative as the start-up investments break some weight on the cash flows.From 1998 onwards, as sales start to increase and costs diminish the flows of cash are positive. In row three and four the cash flows, given a low demand of 5,000 units sold with their corresponding probabilities. It is clear that the costs definitely outweigh the revenues for the first few years, more than in the best-case term in rows one and 2. Interesting to see that in the final row, there is only a positive cash flow recorded in the final year of the project. In this case we can explain the NPV values of all probabilitie s very straightforward.With the given information the cash flows will be negative in case the demand will be low. However we need to make a remark on this simplification of the results. By calculating the expect NPV (which is the sum of the probabilities of each high/low demand occurring times their corresponding NPVs). This gives in the end a positive NPV so investors can wear down this project will be masteryful. B The renunciation lines basically re cave in a situation in which the project is stopped for continuation. What is interesting to notice is that the NPV of the project that continued are lower than the projects where the project was dismantled.Note excessively that this only applies to the situation in where a low demand is expected. The NPV in those cases when the projects are abandoned is adequate to the salvage value of the equipment and buildings. C As the flexibility of the project gets humiliateder, the NPV will get smaller and collect to high volatility the standard recreation will increase. Question 5 A Due to the fact that there is an extra decision node the tree looks bigger. This extra decision is namely the decision to brandish the plant or leave it in its current state. B As this is not possible to suggestion 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 eternally choose the option with the higher NPV. Question 6 As can be seen from the given data, in monetary value of expected engagement Present Values, the large plant seems to get hold of a big benefit 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 t hat one should use a risk adjustment corporate 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 10049,99 Std. Dev 9827,17 10341,43 7869,12 Std. Dev 4871,06 5375,57 4017,85 Coeff. Of Var. 2,95 1,15 0,58 Coeff. Of Var. 0,77 0,67 0,40 The results show that an increase in demand and growth probabilities for twain of the plants (small and large) results in a higher expected NPV, lower standard deviation and l ower correlation, leaders to a higher risk- return payoff.Decreasing initial demand to 60% and high growth possibilities to 50% simultaneously, leads to a decrease in expected NPV, while increasing standard deviation and the covariance leading to a lower risk- return payoff. Furthermore, one can witness that in absolute and in carnal knowledge terms, the impact on the small plant of increasing/decreasing initial demand and growth opportunities does not have as a great influence as on the large plant. Question 9 A sensitivity analysis can help to underline the most important factors affecting the success of a firm or a project.In this case we have articulated success in terms of NPV and have used input factors such as variable costs, units sold, sales price and WACC). With respect to the two different plants one can observe that NPV is relatively more sensitive to the mentioned factors in the case of the small plant. Furthermore, regarding the line of sales prices one can see th at this is by far the line with the highest positive hawk (coefficient), while fixed costs has the shallowest slope. The interpretation therefore is that sales prices have the biggest impact on expected NPV.Furthermore it is worth mentioning that the slope (and the impact) of WACC is quite high (negative) for the large plant. Since the variable costs for the large plant are lower at a rate of 60% compared to 65% of the small plant, one can observe that the sensitivity of the small plants NPV is also relatively high. Question 10 In the theme of scenario analysis it is important to mention that in contrast to the analysis mentioned above, probabilities are appointed to each of the different scenarios. Atlantic Aquaculture Inc. uses best and worst case scenarios (high initial demand/ low initial demand).In addition to that, a scenario analysis appoints a base case as well. This should be done utilizing a probability of 50% for the base scenario and probabilities for the best and wors t should lie at 25% respectively. Independent factors should again be inputs such as variable costs, units sold, sales price and the weighted average of the cost of capital. These inputs should be appointed to a realistic assessment of range they could approach to. The dependent variable logically should be the net present values of the different scenarios.In terms of the ranges of independent variables it should be noted, that these could be obtained by examining historical data of the company in addition to an examination and assessment of company and market environment. Question 11 A four-card monte Carlo simulation typically provides one with an overwhelmingly high amount of simulations, whereas a change of all the variables occurs on a random basis. However, only the average of these is of importance. The input incorporates the correlations of all the variables included. The output is then expressed in the form of samples of NPVs.It is perceive as a more sophisticated way of c onducting a scenario analysis. However, it is also perceived as very delicate in terms of the conduction itself. Question 12 Indeed the abandonment opportunity represents a real put option. This is due to the fact that the company can abandon the project and receive a terminal value. However, this is only reasonable if Atlantic Aquaculture Inc. sells the plant when the salvage value is higher than the value of the discounted future cash flows otherwise received from the project. In this case the real put option would be in the money and vice versa.Regarding the decision tree, with respect to the low demand and low growth opportunity for plan L one can see that the decision of abandonment or not changes the NPV of the project from $-9. 316. 000 to $-6. 711. 000. Regarding the scenario of low initial demand and high growth opportunities the choice to abandon changes the NPV from $-6. 940. 000 to $-6. 439. 000. In both cases it appears to be feasible to abandon the project, thus the va lue of the put option is positive. Plan S on the other side represents a call option since one can decide to buy the facilities or not.Furthermore, the put option for the large plant can be calculated as follows This leads us to a value of $546. 050, which indeed is positive. Question 13 In general, it can be said that both plans have a positive expected NPV overall. However, the smaller plant is the favorable option, since it provides Atlantic Aquaculture with the best risk- return payoff.. Furthermore, if opting for the large plant it is important to mention that the value of the put- option is positive, so in the worst case Atlantic Aquaculture should opt out when facing low initial demand and either low or high growth potential.However, it is also worth mentioning that a risk adjusted cost of capital should be incorporated when calculating for the NPV. Appendices Appendix A Appendix B Cash flows large firm Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Net income 0 0 436 438 1122 1806 2521 3202 3990 Depreciation 0 0 954 1566 1146 846 630 630 630 Op cash flow 0 0 1390 2004 2268 2652 3151 3832 4620 majuscule cash flow -1044 -12300 -427 -496 -574 -711 -814 -931 7397 Net cash flow -1044 -12300 962 1509 1694 1940 2337 2900 43940 Cash flows small firm Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Net income 0 0 1083 919 1129 1298 1440 1506 1575 Depreciation 0 0 553 920 668 488 359 359 359 Op cash flow 0 0 1636 1840 1798 1787 1799 1865 1934 Cap cash flow -1044 -8364 -95 -100 -106 -160 -167 -173 4510 Net cash flow -1044 -8364 1542 1739 1691 1626 1632 1691 19042 Appendix C LARGE FIRM depleted FIRM WACC 9. 00% 9. 00% NPV $17. 140 $7. 633 IRR 25. 83% 22. 78% MIRR 21. 54% 17. 92% PAYBACK 7. 05 years 6. 97 years