Finance for Managers Assignment
This assignment is designed to introduce you to:
- Case studies,
- Construct a cash budget,
- Risk/return analysis as a basis for making investment decisions,
- Explain the risk and techniques associated with evaluating projects,
- Considerations of projects with different lives,
- Financial planning and controlling operations, and
- Additional research skills outside course materials/delivery.
Case study
Angelina and Brad established their business partnership 'Rosanna Roses' 5 years ago. Brad has a degree in horticulture and leaves the marketing and financing of the firm to Angelina as she has a Commerce degree. The business has experienced a solid level of success growing roses for the cut-flower market. It is located on a 6-hectare property north of Hobart. Five hectares are currently under cultivation and Angelina and Brad have been discussing expanding the business by utilising the spare hectare. They have asked you to analyse the following data and provide them with a recommendation as to the acceptability of the project. Brad and Angelina tell you that they will retire 10 years from today. The business will not be sold as Angelina and Brad live on the property.
Brad has been developing three new varieties of roses over the last 2 years. Development costs of the roses so far has been $70000. Details of the new roses are as follows:
- 'Brittany' has a large flamboyant pink flower. The rose bush is sturdy and well suited to commercial growing conditions. The Brittany is well suited to the temperate climate where Rosanna Roses operates, but it is not expected to do well in warmer climates.
- 'Taylor' has been developed for its delightful fragrance. The rose bush is not as robust as the Brittany, but is expected to perform reasonably well under commercial growing conditions. It will require a lot of pruning to prevent it turning into a monster.
- 'Madonna' has a less exciting flower than the Brittany and a milder perfume than the Taylor, but it does have the advantage of longevity as a cut flower. It is a relatively low- maintenance rose bush to cultivate.
Brad estimates that it will take 6 months for further development and testing of the new roses if the decision is made to expand the operation of Rosanna Roses with cultivation of these three roses. It would then take another 6 months to generate sufficient stock to plant a hectare of land. The operating cash outflow associated with the further development and stock production is $140000 and is tax deductible. The hectare of land that would be planted would need to be cleared, graded and cultivated. Angelina estimates that this would cost $20000. The soil would need to be enriched with 10 tonnes of manure at a cost of $100 per tonne. The clearing and fertilising costs are tax deductible.
The clearing and fertilising of the land would occur the day before the new roses are taken from the green- house for planting out.
The time from planting to a commercial quantity of flower buds is 3 years after the roses are transferred from the greenhouse to the soil. After the roses are transplanted from the greenhouse to the soil, the labour cost per hectare of roses under cultivation is $10000 pa, pest control will cost a further $5000 pa and the annual fertiliser cost is $500 per hectare. Additional labour costs of $3000 pa are required when the roses are cut and packed in boxes for sale. The new project will utilise the existing cultivation equipment. This equipment was purchased 5 years ago for a total cost of $90000 and is being depreciated using the prime cost method over 10 years. It is used for all current projects.
A marketing consultant was contracted 6 months ago to provide market research on the new rose varieties. Rosanna Roses received an invoice for $5000 and the following advice this week.
REQUIRED -
1. Advise Angelina and Brad on their decision about accepting or rejecting the project. Show all equations and calculations using spreadsheets.
2. To support your calculations in (1), prepare a justification of the cash flows you have used in your analysis. That is, you should identify why you have included each cash inflow and outflow to arrive at your net cash flows. If you have omitted cash flows discussed in the information provided, you should also explain why these have not been used in the analysis.
3. Justify your choice of discount rate for the analysis.
4. Currently, Rosanna Roses is structured as a partnership. Brad and Angelina are thinking about listing the firm on the ASX if this project is successful. They have asked you to explain the impact (if any) that listing would have on the capital budgeting process. Write a short essay to advise them on this matter. (300 words).
5. Include a reworked analysis of the project (that is, repeat requirement 1) assuming Rosanna Roses is structured as a company that is fully integrated with the dividend imputation system. Show all calculations.
Attachment:- Assignment File.rar