Atlantic Aquaculture
Atlantic Aquaculture, Inc.
Capital Budgeting with Staged Entry
Question 1
A – Even though Atlantic Aquaculture already bought the land needed for 300,000 USD, its value today is 900,000 USD. We can therefore conclude the 900,000 USD is an opportunity cost as the land can be sold at this value.
B – In this case it is best for the company to use the option to the land acquisition. By calculating the NPV the option is worth $-852,093.66. Buying the land without the option would bring the company back to $-900,000.00. We used a discount rate of 6%, as this is linked with the appreciation of the land annually. The calculation of the NPV can be found in Appendix A.
Question 2
A – The R&D cash flows are $48,000 annually for the years 1998, 1999 and 2000. In 1996 we are able to shield taxes with the appreciation. At a tax rate of 40% this result in a tax shield worth $144,000.
B – From the case is known that the salvage value will only be taxed when the buildings are actually sold, as long as the asset’s value is half of the book value the sale will go through with. Take note that a 40% tax rate is used to calculate the tax shield.
C – The cash flows are shown in the Appendix B.
Question 3
As can be seen in the Appendix C the large project, while taking into account a rwacc of 9% and the expectation that there will be high demand and high growth opportunities for the firm’s products; the Net Present Value of the firm will be $17,140,000.00. An Internal Rate of Return will be realized of 25.83%. Furthermore the MIRR is calculated as 21.54% and the payback period of the project is 7.05 years. Taking all other factors the same, when the firm is building a small facility, the NPV would be $11,723,000.00, the IRR 23.39%, the MIRR 18.05% and the period in which the costs will be paid back 7.18 years.
Question 4
A – In the Appendix the decision trees are shown and the following elements deserve attention. The nodes start with having high/low demand
Capital Budgeting with Staged Entry
Question 1
A – Even though Atlantic Aquaculture already bought the land needed for 300,000 USD, its value today is 900,000 USD. We can therefore conclude the 900,000 USD is an opportunity cost as the land can be sold at this value.
B – In this case it is best for the company to use the option to the land acquisition. By calculating the NPV the option is worth $-852,093.66. Buying the land without the option would bring the company back to $-900,000.00. We used a discount rate of 6%, as this is linked with the appreciation of the land annually. The calculation of the NPV can be found in Appendix A.
Question 2
A – The R&D cash flows are $48,000 annually for the years 1998, 1999 and 2000. In 1996 we are able to shield taxes with the appreciation. At a tax rate of 40% this result in a tax shield worth $144,000.
B – From the case is known that the salvage value will only be taxed when the buildings are actually sold, as long as the asset’s value is half of the book value the sale will go through with. Take note that a 40% tax rate is used to calculate the tax shield.
C – The cash flows are shown in the Appendix B.
Question 3
As can be seen in the Appendix C the large project, while taking into account a rwacc of 9% and the expectation that there will be high demand and high growth opportunities for the firm’s products; the Net Present Value of the firm will be $17,140,000.00. An Internal Rate of Return will be realized of 25.83%. Furthermore the MIRR is calculated as 21.54% and the payback period of the project is 7.05 years. Taking all other factors the same, when the firm is building a small facility, the NPV would be $11,723,000.00, the IRR 23.39%, the MIRR 18.05% and the period in which the costs will be paid back 7.18 years.
Question 4
A – In the Appendix the decision trees are shown and the following elements deserve attention. The nodes start with having high/low demand