You are required to submit the assignment as an Excel workbook. All quantitative data in the Excel spreadsheet should be referenced by formula that links to relevant cell(s) in the parameter table.
Late submission without approved extension will attract penalty of 5/100 a day.
Assignment 1
A government is considering a small agriculture project that produces raw cotton. The current and expected future exchange rate is $US1=$L5.
Output
- The project will begin production in year 2 and last 20 years.
- The project is designed to produce 80 000 tonnes of raw cotton per annum for export and world price is expected to be $US120 per tonne.
- The raw cotton is subject to an export tax of 15 per cent. Cost of inputs The project will require the following inputs: Investment costs
- All investment costs are incurred in year 1.
- Import pumping and harvesting equipment at the world price of $US45 million. At the end of that project the equipment could be sold for 10 per cent of its purchase price.
- Land worth $L450 million in local dollars. At the end of that project, the land could be sold for 30 percent more than its current value. The increase in land value is due to the soil conservation component of the project which is expected to improve the soil quality. Operating costs
- All operating costs are incurred from year 2 to the end of the project life.
- Imported chemicals and fertilisers required by the project will have to pay the world price of $US20 per tonne of cotton. These have an import tariff of 40 per cent.
- The project will require 400 farm labourers, each of whom will be paid the government minimum wage of $L600 per month.
- Other non-traded inputs to the project include electricity, the domestic cost of which is $20 per tonne of raw cotton produced.
Questions
a) Set out the parameter table for the project, including all the information outlined above.
b) Using cell references to the parameter table, construct the financial cash flow for the project.
c) Calculate the financial NPV of the project. Assume that the financial discount rate is 3 per cent using 'end of the year discounting' method.
d) Calculate the benefit cost ratio.
e) Should the project be accepted by the government for the purpose of evaluating the overall profitability of the project if this is the only project submitted to the government for consideration.
Note: Round off all figures to two decimal place of a million local currency.