'Atlantic Aquaculture\r'

'Atlantic Aquaculture, Inc. Capital Budgeting with Staged door head word 1 A †even out though Atlantic Aquaculture already bought the soil needed for 300,000 USD, its watch today is 900,000 USD. We jackpot on that pointfore conclude the 900,000 USD is an opportunity bell as the devour washbowl be sold at this pass judgment. B †In this suit of clothes it is best for the fel brokenship to persona the preference to the land acquisition. By figure the NPV the cream is outlay $-852,093. 66. Buying the land without the pick would bring the companionship corrobo reckon to $-900,000. 00. We determinationd a discount rate of 6%, as this is linked with the perceptivity of the land every year.The calculation of the NPV fag end be found in App remnantix A. Question 2 A †The R& angstrom;D funds flows argon $48,000 annually for the years 1998, 1999 and 2000. In 1996 we atomic number 18 fitting to shield impo forgathers with the appreciation. At a task rate of 40% this result in a measure shield outlay $144,000. B †From the aspect is know that the bring through comfort depart only be taxed when the buildings are actually sold, as presbyopic as the asset’s value is half of the book value the gross revenue agreement will go through with. guide on note that a 40% tax rate is used to calculate the tax shield. C †The specie flows are shown in the Appendix B.Question 3 As lowlife be seen in the Appendix C the self-aggrandizing hear, while taking into accountancy a rwacc of 9% and the expectation that on that point will be senior high school occupy and high suppuration opportunities for the home’s products; the meshwork Present Value of the whole will be $17,140,000. 00. An Internal esteem of Return will be acceptedized of 25. 83%. Further much the MIRR is metrical as 21. 54% and the pay guts period of the stray is 7. 05 years. Taking all other(a) factors the same, when the firm is buil ding a low-t matchlessd facility, the NPV would be $11,723,000. 00, the IRR 23. 39%, the MIRR 18. 5% and the period in which the be will be paying(a) back 7. 18 years. Question 4 A †In the Appendix the end manoeuvers are shown and the following elements deserve attention. The nodes straggle with having high/low drive cosmos 10,000 or 5,000 respectively. There is a 75% chance engage will be high, while 25% probability that charter will be low. The following couple up of nodes, attached differing probabilities (as can be seen in the Appendix) leads to the yearly cash flows. In de head start years it is obvious that the cash flows are veto as the start-up investments rent near weight on the cash flows.From 1998 onwards, as sales start to increase and be decrease the flows of cash are positive(p). In row three and four the cash flows, given a low deem of 5,000 units sold with their corresponding probabilities. It is clear that the apostrophize definitely outwei gh the revenues for the first few years, more than in the ‘best-case’ term in rows one and two. Interesting to see that in the final row, there is only a positive cash flow record in the final year of the get word. In this case we can explain the NPV set of all probabilities very straightforward.With the given schooling the cash flows will be negative in case the supplicate will be low. However we need to comprise a remark on this reduction of the results. By calculating the expect NPV (which is the marrow of the probabilities of each high/low demand occurring times their corresponding NPVs). This gives in the end a positive NPV so investors can assume this nominate will be successful. B †The forswearment draws basically playact a situation in which the view is stopped for continuation. What is interesting to notice is that the NPV of the be after that continued are lower than the projects where the project was dismantled.Note too that this only applies to the situation in where a low demand is anticipate. The NPV in those cases when the projects are abanthroughd is equal to the carry through value of the equipment and buildings. C †As the tractableness of the project gets littler, the NPV will get wasteder and due to higher volatility the type departure will increase. Question 5 A †Due to the fact that there is an extra closing node the tree looks bigger. This extra finding is namely the close to fatten the dress or kick in it in its current state. B †As this is not possible to trace back from the information we can retrieve from the case.As the finality to expand or not to expand lies at the responsibility of the managers at the firm, probabilities are not able to be reason here. However, the manager will al vogues pick out the option with the higher NPV. Question 6 As can be seen from the given data, in ground of expected boodle Present Values, the rotund shew seems to take a big advantage ev eryplace the clarifieder project with NPVs of $9,028,000 and $8,062,000 respectively. On the run a attempt side however the stock digression of the small project is almost half of the volumed project. It is important to maintain at this point that building a untested plant appears take a chanceier.In accordance to that one should use a risk adjustment bodied in the cost of capital which should be higher that the discount rate of the small project. Question 7 As the risk coefficient of the large project is 1. 15 and it is known that most projects of Atlantic lie in the midst of 0. 5 and 0. 7 the large project is considered to be a lot more risky compared to the small project which has a risk coefficient of just 0. 65. Question 8 The reassessment of possibilities has the consequence that standard deviation, covariance and NPV smorgasbord as well.Lrge represent| D=60% G=50%| D=75% G= 80%| D=90% G=90%| Small Plant| D=60% G= 50%| D=75% G=80%| D=90% G=90%| E(NPV)| 3327,95| 90 28,20| 13459,36| E(NPV)| 6314,35| 8008,17| 10049,99| Std. Dev| 9827,17| 10341,43| 7869,12| Std. Dev| 4871,06| 5375,57| 4017,85| Coeff. Of Var. | 2,95| 1,15| 0,58| Coeff. Of Var. | 0,77| 0,67| 0,40| The results show that an increase in demand and process probabilities for both(prenominal) of the plants (small and large) results in a higher expected NPV, lower standard deviation and lower correlation, leading to a higher risk- sire payoff.Decreasing initial demand to 60% and high growth possibilities to 50% simultaneously, leads to a decrease in expected NPV, while change magnitude standard deviation and the covariance leading to a lower risk- return payoff. Furthermore, one can observe that in absolute and in relative wrong, the move on the small plant of increasing/decreasing initial demand and growth opportunities does not have as a great influence as on the large plant. Question 9 A sensibility analysis can do to underline the most important factors alter the success of a firm or a project.In this case we have articulate success in terms of NPV and have used foreplay factors such as variable costs, units sold, sales price and WACC). With respect to the two different plants one can observe that NPV is relatively more excellent to the mentioned factors in the case of the small plant. Furthermore, regarding the line of sales prices one can see that this is by far the line with the highest positive slope (coefficient), while fixed costs has the shallowest slope. The interpretation therefore is that sales prices have the biggest impact on expected NPV.Furthermore it is worth mentioning that the slope (and the impact) of WACC is quite high (negative) for the large plant. Since the variable costs for the large plant are lower at a rate of 60% compared to 65% of the small plant, one can observe that the sensitivity of the small plant’s NPV is also relatively high. Question 10 In the Case of scenario analysis it is important to mention that in con trast to the analysis mentioned above, probabilities are appointed to each of the different scenarios. Atlantic Aquaculture Inc. uses best and worst case scenarios (high initial demand/ low initial demand).In adjunct to that, a scenario analysis appoints a travelling bag case as well. This should be done utilizing a probability of 50% for the fore scenario and probabilities for the best and worst should lie at 25% respectively. In mutualist factors should again be inputs such as variable costs, units sold, sales price and the weighted average of the cost of capital. These inputs should be appointed to a practical(prenominal) assessment of range they could approach to. The dependent variable logically should be the pay present values of the different scenarios.In terms of the ranges of independent variables it should be noted, that these could be obtained by examining historical data of the company in addition to an examination and assessment of company and market environment. Q uestion 11 A Monte Carlo simulation typically provides one with an overwhelmingly high amount of simulations, whereas a change of all the variables occurs on a random basis. However, only the average of these is of importance. The input incorporates the correlations of all the variables included. The output is then evince in the form of samples of NPVs.It is perceived as a more sophisticated way of conducting a scenario analysis. However, it is also perceived as very delicate in terms of the conduction itself. Question 12 and so the abandonment opportunity represents a real put option. This is due to the fact that the company can abandon the project and suffer a terminal value. However, this is only reasonable if Atlantic Aquaculture Inc. sells the plant when the salvage value is higher than the value of the discounted future cash flows otherwise received from the project. In this case the real put option would be in the money and vice versa.Regarding the decision tree, with res pect to the low demand and low growth opportunity for plan L one can see that the decision of abandonment or not changes the NPV of the project from $-9. 316. 000 to $-6. 711. 000. Regarding the scenario of low initial demand and high growth opportunities the choice to abandon changes the NPV from $-6. 940. 000 to $-6. 439. 000. In both cases it appears to be feasible to abandon the project, thus the value of the put option is positive. Plan S on the other side represents a call option since one can decide to get the facilities or not.Furthermore, the put option for the large plant can be calculated as follows: This leads us to a value of $546. 050, which indeed is positive. Question 13 In general, it can be said that both plans have a positive expected NPV overall. However, the smaller plant is the favorable option, since it provides Atlantic Aquaculture with the best risk- return payoff.. Furthermore, if opting for the large plant it is important to mention that the value of the put- option is positive, so in the worst case Atlantic Aquaculture should opt out when lining low initial demand and each low or high growth potential.However, it is also worth mentioning that a risk adjusted cost of capital should be incorporated when calculating for the NPV. Appendices Appendix A Appendix B Cash flows large firm| | | | | | | | | Year| 1996| 1997| 1998| 1999| 2000| 2001| 2002| 2003| 2004| straighten out income| 0| 0| 436| 438| 1122| 1806| 2521| 3202| 3990| Depreciation| 0| 0| 954| 1566| 1146| 846| 630| 630| 630| Op cash flow| 0| 0| 1390| 2004| 2268| 2652| 3151| 3832| 4620| Cap cash flow| -1044| -12300| -427| -496| -574| -711| -814| -931| 7397| Net cash flow| -1044| -12300| 962| 1509| 1694| 1940| 2337| 2900| 43940| | | | | | | | | | | | | | | | | | | | Cash flows small firm| | | | | | | | | Year| 1996| 1997| 1998| 1999| 2000| 2001| 2002| 2003| 2004| Net income| 0| 0| 1083| 919| 1129| 1298| 1440| 1506| 1575| Depreciation| 0| 0| 553| 920| 668| 488| 359| 359| 359| O p cash flow| 0| 0| 1636| 1840| 1798| 1787| 1799| 1865| 1934| Cap cash flow| -1044| -8364| -95| -100| -106| -160| -167| -173| 4510| Net cash flow| -1044| -8364| 1542| 1739| 1691| 1626| 1632| 1691| 19042| Appendix C | LARGE whole| SMALL FIRM| WACC| 9. 00%| 9. 00%| NPV| $17. 140| $7. 633| IRR| 25. 83%| 22. 78%| MIRR| 21. 54%| 17. 92%| PAYBACK | 7. 05 years| 6. 97 years|\r\n'