Harris Seafood Assignment 2
Harris Seafood
Answer the following questions
a. Should Harris Seafoods enter the shrimp processing business by building the new plant? Please assume the firm will be unable to use the Industrial Revenue Bond financing mentioned at the end of the case (we will return to this topic in a later case).
Yes, I think that this company should build a new plant that allows them to grow in the industry, even if they are unable to use the Industrial Revenue Bond, they will have other financing alternatives.
Instead of Industrial Revenue bonds, Harris Seafoods can use conventional bonds; which they are going to reduce de NPV.
Although it can use bank loans, the NPV will decrease.
The company can financed the new plant with only debt or only equity, If they use the debt to finance the NPV will increase because Kd<Ke, otherwise if they decided to finance themselves with equity the NPV will decrease, because de Ke > Kd. Also we need to analize if the NPV>0
i. Before running any numbers, do you expect this project to have a positive NPV based upon the underlying economics?
Underlying economics:
-(Demand of shrimp uncertain)
As we know U.S. economy was on recession on this years, In 1975 the tax rate was the highest since 1947; the unemployment rate was extremely high (6%). The average of the Treasury Bills from 1970-1980 was 7.08%.
Despite the economic conditions, analyzing the Income statement and Balance sheet with an inflation of 11%; I think that the purchase of a new plant is a good long term investment which will start generating profits year after year while the country's economy is recovering. We will begin to see how economic and sales growth will gradually increase, which will allow us to recover the investment and make a profit, this is the reason why I would approve this project , in conclusion I think that the NPV will be positive.
ii. What are the specific sources of value, and how important are they?
We need to considera all the
Answer the following questions
a. Should Harris Seafoods enter the shrimp processing business by building the new plant? Please assume the firm will be unable to use the Industrial Revenue Bond financing mentioned at the end of the case (we will return to this topic in a later case).
Yes, I think that this company should build a new plant that allows them to grow in the industry, even if they are unable to use the Industrial Revenue Bond, they will have other financing alternatives.
Instead of Industrial Revenue bonds, Harris Seafoods can use conventional bonds; which they are going to reduce de NPV.
Although it can use bank loans, the NPV will decrease.
The company can financed the new plant with only debt or only equity, If they use the debt to finance the NPV will increase because Kd<Ke, otherwise if they decided to finance themselves with equity the NPV will decrease, because de Ke > Kd. Also we need to analize if the NPV>0
i. Before running any numbers, do you expect this project to have a positive NPV based upon the underlying economics?
Underlying economics:
-(Demand of shrimp uncertain)
As we know U.S. economy was on recession on this years, In 1975 the tax rate was the highest since 1947; the unemployment rate was extremely high (6%). The average of the Treasury Bills from 1970-1980 was 7.08%.
Despite the economic conditions, analyzing the Income statement and Balance sheet with an inflation of 11%; I think that the purchase of a new plant is a good long term investment which will start generating profits year after year while the country's economy is recovering. We will begin to see how economic and sales growth will gradually increase, which will allow us to recover the investment and make a profit, this is the reason why I would approve this project , in conclusion I think that the NPV will be positive.
ii. What are the specific sources of value, and how important are they?
We need to considera all the