case2_04 - Case 2 Capital Budgeting with Staged Entry...

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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
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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 profetable 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 catfisht 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 acquisotion. 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 substracted 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
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case2_04 - Case 2 Capital Budgeting with Staged Entry...

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