As a shrimp industry Harris Seafood Inc. is one of the biggest producers of frozen shrimp in the United States. Company has reached approximately $33mln of sales by 1979. Despite the risks of supply and demand of shrimp, company has been very successful in terms of average profitability. Our role as analysts was to decide whether processing plant project is a worthwhile addition to Harris Seafoods. Analyst assumptions
The valuation of the firm starts in year 1980. The 48% marginal tax rate was given. In order to finance the project we have decided to issue $7,000,000 worth of 12-year maturity Industrial Revenue bonds to fund the investment in property, plant and equipment. We have decided to use discounted cash flow analysis as our valuation method. From two inflation choices provided, we picked an inflation of 0% as we strongly believe that using 11% inflation would add an additional uncertainty to our analysis, exposing our project to even larger assumption of costs and revenue. As for our cost of capital we assume the rate of 16% that is the cost of financing debt. For the depreciation and amortization we have used the numbers given in Exhibit 6, along with pounds of shrimp sold and price per pound. Calculation of Capex and NWC
As our initial capital expenditure for year 1980 we have put the processing plant initial expenditure of $10,035 followed by Selling, general and administrative costs in years 1981-1986. We also added bond installments expense of $583,333.33 (=7,000,000/12) to the Capex. The bond installments are adjusted for 9.5% interest in our DCF model. For the net working capital we have put the total current assets given in Exhibit6 less the bond expenses which we figured would be the only current liabilities for years 1980 and forward. Discount rate and growth rate
We have not decided on using the Capital Asset Pricing Model (CAPM) to solve for the cost of equity as the estimation of beta and the growth are difficult...