case2_04_2 - Case 2 Capital Budgeting with Staged Entry...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Case 2 Capital Budgeting with Staged Entry Maastricht University Faculty of Economics and Business Administration Maastricht, November 16 2004 Arends, Tangela I199524 Middelbeek, Robbert I168165 Pollaert, Rian I161446 Group 2 Subgroup 2 Tutor: Nils Kok Financial Management & Policy Report Case 2
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
In the seafood industry, Gulf Coast Fisheries is the leading seafood harvester and processor. At the moment, they concentrate only on a variety of saltwater seafood, however, due to increased competition they are considering to move part of their operations into the freshwater catfish market. To examine if this shift is profitable and which strategy they should adopt, we will come up with a recommendation based on the following questions. 1 . Consider the land acquisition. a) What cost, if any, should be attributed to the catfish project? The firms already owns a suitable tract of land that can be sold now for $ 1.500.000, but other suitable sites can also be purchased for this amount. Therefore, the costs that should be attributed to the catfish project amounts $ 1.500.000. Gulf Coast Fisheries, INC. has the option to acquire additional land for the Shrimp Division; this has not to be taken in account considering the cost of land acquisition. If the land is used for the catfish project, the Shrimp Division should purchase a new site by exercising the option. The option that will pay $ 100.000 in December 1995 and $ 1.900.000 in December 1999, is more valuable than buying land today for a price of $ 1.500.000. The following question will give a more precise answer to this. b) Assuming that the currently owned site is used for this project, how should the Gulf Coast Shrimp Division obtain a site? What discount rate should be used in analyzing the option alternative? Using an annual appreciation rate of 9 percent, the value of the site can be calculated as follows: $ 1.500.000 * 1,09 4 = $ 2.117.372,4. Next, this value can be used to calculate the option gain: $ 2.117.372,4 - $ 1.900.000 / (1,04) 4 = $ 185.810,8. The general inflation rate is 4 percent. Finally, the profit or loss of exercising the option can be computed: $ 185.810,8 - $ 100.000 = $ 85.810,8. The option price is subtracted of the option gain, that gives a option profit of $85.810,8. In stead of buying the land today for $ 1.500.000, the Shrimp Divisions can earn a profit. The discount rate used in the calculations is the inflation rate of 4 percent, which is assumed to be the risk free rate. 2
Image of page 2
2. a) What would be the R&D cash flows in 1997 through 2003? Should any R&D cash flow for 1995 be included in the analysis? In total, $ 1.000.000 was spend on R&D in 1995, of which $ 400.000 has been expensed for tax purposes. With tax consideration, the amount of $ 240.000 ([1- 0.4]*400.000) is the cash outflow. The remaining $ 600.000 will be amortized over the first 3 years of the operating life of the new facility. Cash flow is $80.000 (600.000*0.4/3). b) How is salvage value taxed? The salvage value is the market value of an asset after its useful life. Both buildings fall into the MACRS 31.5-year class, and will be depreciated starting in 1997. The building considered under Plan L, has a salvage value of $ 3.880.000 (5000- [5000*0.032*7]) after seven years. It is stated that the buildings could be sold for about half their book value at the end of 2003. This is then $ 1.940.000. The taxation
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern