case2_04_2

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

Info iconThis 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 Report Case 2
Background image of page 1

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

View Full DocumentRight 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
Background 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)
Background image of page 3

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

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

This note was uploaded on 11/16/2009 for the course F 3033 taught by Professor Hh during the Spring '09 term at Maastricht.

Page1 / 10

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

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online