A company can choose between two projects to invest in: Project 'A' and Project 'B'. It...

 

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A company can choose between two projects to invest in: Project 'A' and Project 'B'. It can only pursue one of the projects, so it needs to determine which is the better between the two. Project A is in the agricultural industry in New Zealand, being offered for sale by its current owner for $50mn. It will last forever, and generate annual recurring revenues of $20mn. The company cannot obtain detailed cost structures for the project, but estimates it will have a (net) profit margin of 20%. The project will not require any working capital, D&A or CAPEX, but there is a 20% tax rate. Project B is in the high-tech biomedical industry in Canada, offered for sale by its current owner for $20mn. It is supposed to only last 5 years. During this time, the project will have annual recurring revenues of $25mn., variable production costs of $2mn., and overhead of $6mn. If the company decides to pursue this project, it will also lose $2mn. in revenues from other products it currently sells (without any cost savings) each year. As in Project A, there is a 20% tax rate. The project needs $4mn. in working capital in the first year (year 1), which is fully recovered in the last year (year 5). Also, in year 3, a $10mn. CAPEX investment needs to be made in new production equipment for the project which can be used for 2 years. The discount rate is 10%; there is no debt; the acquisition of the projects will take place in year 0, meaning all revenues etc. start in year 1. Please answer the following questions in a short essay: (1) Which of the two projects should the company pursue, and why? (2) What is the maximum price the company should be willing to pay for either project, and why? In your answer, please elaborate on the way you derived your answer and explain which numbers you took into consideration. In your answer, make sure to refer to the numbers you calculated in order to justify your investment recommendation. Please also: show the P&L and FCF calculations you perform in the tables in the solutions template, by entering the respective numbers and showing your results. All mentioned numbers in your essay answer must be shown in your calculations. Question 1 Please perform your calculations for the evaluation of Project A in this table. Feel free to extend this table if you deem it necessary. Please perform your calculations for the evaluation of Project B in this table. Feel free to extend this table if you deem it necessary. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 A company can choose between two projects to invest in: Project 'A' and Project 'B'. It can only pursue one of the projects, so it needs to determine which is the better between the two. Project A is in the agricultural industry in New Zealand, being offered for sale by its current owner for $50mn. It will last forever, and generate annual recurring revenues of $20mn. The company cannot obtain detailed cost structures for the project, but estimates it will have a (net) profit margin of 20%. The project will not require any working capital, D&A or CAPEX, but there is a 20% tax rate. Project B is in the high-tech biomedical industry in Canada, offered for sale by its current owner for $20mn. It is supposed to only last 5 years. During this time, the project will have annual recurring revenues of $25mn., variable production costs of $2mn., and overhead of $6mn. If the company decides to pursue this project, it will also lose $2mn. in revenues from other products it currently sells (without any cost savings) each year. As in Project A, there is a 20% tax rate. The project needs $4mn. in working capital in the first year (year 1), which is fully recovered in the last year (year 5). Also, in year 3, a $10mn. CAPEX investment needs to be made in new production equipment for the project which can be used for 2 years. The discount rate is 10%; there is no debt; the acquisition of the projects will take place in year 0, meaning all revenues etc. start in year 1. Please answer the following questions in a short essay: (1) Which of the two projects should the company pursue, and why? (2) What is the maximum price the company should be willing to pay for either project, and why? In your answer, please elaborate on the way you derived your answer and explain which numbers you took into consideration. In your answer, make sure to refer to the numbers you calculated in order to justify your investment recommendation. Please also: show the P&L and FCF calculations you perform in the tables in the solutions template, by entering the respective numbers and showing your results. All mentioned numbers in your essay answer must be shown in your calculations. Question 1 Please perform your calculations for the evaluation of Project A in this table. Feel free to extend this table if you deem it necessary. Please perform your calculations for the evaluation of Project B in this table. Feel free to extend this table if you deem it necessary. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Answer rating: 100% (QA)

To determine which project the company should pursue we need to compare the net present value NPV of each project The NPV represents the value generat... View the full answer