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    Fin Model Class4 Step1 Step2 Frozen Catfish Cash Flow Analysis Homework

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    Gel vira
    The Fresh and Frozen Fish Company is considering expanding into frozen catfish fillets. This would require purchasing an existing 80-acre catfish farm for $250,000 plus $400,000 for buildings and equipment. The firm expects to sell 200,000 pounds of catfish fillets at $2.50 per pound in year 1, with demand growing 8% annually. It will create a spreadsheet to analyze costs, cash flows, NPV, and IRR over 5 years to determine the risk of this expansion project.

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    Fin Model Class4 Step1 Step2 Frozen Catfish Cash Flow Analysis Homework

    Uploaded by

    Gel vira
    71 views6 pages
    The Fresh and Frozen Fish Company is considering expanding into frozen catfish fillets. This would require purchasing an existing 80-acre catfish farm for $250,000 plus $400,000 for buildings and equipment. The firm expects to sell 200,000 pounds of catfish fillets at $2.50 per pound in year 1, with demand growing 8% annually. It will create a spreadsheet to analyze costs, cash flows, NPV, and IRR over 5 years to determine the risk of this expansion project.

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    FIN_MODEL_CLASS4_STEP1_STEP2_FROZEN_CATFISH_CASH_FLOW_ANALYSIS_HOMEWORK.xlsx

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    The Fresh and Frozen Fish Company is considering expanding into frozen catfish fillets. This would require purchasing an existing 80-acre catfish farm for $250,000 plus $400,000 for buildings and equipment. The firm expects to sell 200,000 pounds of catfish fillets at $2.50 per pound in year 1, with demand growing 8% annually. It will create a spreadsheet to analyze costs, cash flows, NPV, and IRR over 5 years to determine the risk of this expansion project.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    71 views6 pages

    Fin Model Class4 Step1 Step2 Frozen Catfish Cash Flow Analysis Homework

    Uploaded by

    Gel vira
    The Fresh and Frozen Fish Company is considering expanding into frozen catfish fillets. This would require purchasing an existing 80-acre catfish farm for $250,000 plus $400,000 for buildings and equipment. The firm expects to sell 200,000 pounds of catfish fillets at $2.50 per pound in year 1, with demand growing 8% annually. It will create a spreadsheet to analyze costs, cash flows, NPV, and IRR over 5 years to determine the risk of this expansion project.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 6

    THE FRESH AND FROZEN FISH COMPANY HAS AN EXPANSION IDEA.

    THE FRESH AND FROZEN FISH COMPANY CURRENTLY MARKETS FROZEN FISH FILLETS
    AND OTHER RELATED PRODUCTS. THE FIRM, SEEKING EXPANSION IDEAS, HAS DECIDED TO LOOK
    INTO THE POSSIBILITY OF A LINE OF FROZEN CATFISH FILLETS.
    ENTRY INTO THIS BUSINESS WOULD REQUIRE THE PURCHASE OF AN EXISTING 80-ACRE CATFISH FARM IN WESTERN ALABAMA.
    THE LAND WOULD COST $250,000 AND ANOTHER $400,000 FOR THE BUILDINGS AND EQUIPMENT.
    THE FIRM USES A WELL KNOWN INVESTMENT BANKER TO ASSIST IN THE ANALYSIS OF THIS EXPANSION IDEA:
    THE BUILDINGS AND EQUIPMENT WILL BE DEPRECIATED USING MACRS WITH A USEFUL LIFE OF 20 YEARS.
    EXPECTATION IS THAT THE FARM WILL BE SOLD , AT THE END OF FIVE YEARS, FOR $550,000; $350,000 FOR THE LAND AND $200,000 FOR THE BUILDINGS AND
    IT IS ESTIMATED THAT THE FIRM WILL BE ABLE TO SELL 200,000 POUNDS OF CATFISH FILLETS AT AN AVERAGE PRICE OF $2.50 PER POUND DURING THE FIRST YEAR.
    UNIT DEMAND IS EXPECTED TO GROW AT A RATE OF 8% ANNUALLY THEREAFTER.
    VARIABLE OPERATING EXPENSES ARE EXPECTED TO AVERAGE 60% OF GROSS SALES, AND FIXED COSTS (NOT INCL. DEPRECIATION) WILL BE $80,000 PER YEAR.
    THE FIRM'S MARGINAL TAX RATE IS 35% AND ITS COST OF CAPITAL IS 10% .

    ASSIGNMENT: WE WANT TO ANALYZE THE RISK OF THIS EXPANSION PROJECT.


    WE SHOULD BEGIN, THEREFORE, BY CREATING A SPREADSHEET TO DETERMINE ITS ANNUAL COSTS, ANNUAL AFTER TAX CASH FLOWS, PROJECT NPV / IRR.
    THE BEST WAY TO MOVE FORWARD WITH A PROBLEM SUCH AS THIS IS TO TAKE THE GIVEN DATA AS IT COMES AND ENTER INTO A SPREADSHEET CAREFUL TO LABEL EVERY ROW.
    THEN TO PROJECT BEFORE TAX AND AFTER TAX CASH FLOWS, FROM YEAR 1 TO YEAR 5; FINALLY COMPUTING THE PROJECT AFTER TAX NPV AND IRR.
    SPREADSHEET: DETERMINATION OF COSTS AND ANNUAL CASH FLOWS; AFTER TAX NPV AND IRR
    YEAR END YEAR END YEAR END YEAR END YEAR END YEAR END
    0 1 2 3 4 5
    COST OF LAND ? ?
    COST OF BLDGS & EQUIP ? ?
    BOOK VALUE OF BLDGS&EQUIP ? ? ? ? ?
    SALES REVENUE ? ? ? ? ?
    PRICE PER POUND ? ? ? ? ? 2.50
    UNITS SOLD ( CATFISH LBS ) ? ? ? ? ? 200,000
    UNIT SALES GROWTH RATE ? 60%
    VARIABLE COSTS (% OF SALES REVE ? ? ? ? ? ?
    FIXED COSTS ? ? ? ? ?
    MACRS: DEPREC EXPENSE 20-YR % 3.75% 7.22% 6.68% 6.18% 5.71%
    MACRS: DEPREC EXPENSE ? ? ? ? ?
    TAXABLE CASH FLOWS ? ? ? ? ?
    TAX RATE 35% 35% 35% 35% 35%
    TAXES ? ? ? ? ? SELL LAND + BLDGS&EQUIP:

    ATCF ? ? ? ? ? ATCF ON LAND= ATCF ON BLDG= TOTAL


    ANNUAL CF ? ? ? ? ? ? ? ? ?
    COST OF CAPITAL = 10.0%
    NPV= ?
    IRR= ?
    RISK PREMIUM (IRR - COST OF CAPITAL)= ?

    NOTES:

    MACRS: DEPREC EXPENSE 20-YR % GIVEN

    MACRS: DEPREC EXPENSE MACRS % * COST OF BLDGS & EQUIP

    BOOK VALUE OF BLDGS&EQUIP INITIAL COST - ACCUMULATED DEPRECIATION

    PRICE PER POUND FIXED AT $2.50 / LB

    UNITS SOLD ( CATFISH LBS ) YEAR1 = 200,000 THEN INCREASES BY 8% / YEAR

    SALES REVENUE PRICE PER LB * UNITS SOLD (LBS)

    FIXED COSTS 80,000 PER YEAR

    VARIABLE COSTS (% OF SALES REVENUE) 60% OF REVENUE EACH YEAR

    TAXABLE CASH FLOWS PER YEAR = REVENUE - FIXED COSTS - VARIABLE COSTS - DEPRECIATION

    TAX RATE 35% PER YEAR

    TAXES PER YEAR = TAXABLE CASH FLOW * TAX RATE

    AFTER TAX CASH FLOWS PER YEAR = TAXABLE CASH FLOW - TAX + DEPRECIATION

    DEPRECIATION IS ADDED BACK SINCE IT IS NOT AN ACTUAL CASH OUTFLOW

    PER YEAR = (REVENUE - FIXED COST - VARIABLE COST -DEPRECIATION )*(1 - TAX RATE) + DEPRECIATION

    SAME AS , PER YEAR = (REVENUE - FIXED COSTS - VARIABLE COSTS) * (1 - TAX RATE) + DEPRECIATION * TAX RATE

    SELL LAND: YEAR 5 AFTER TAX CASH FLOW = SALE PRICE - (SALE PRICE - COST)*TAX RATE

    SELL BLDGS & EQUIP: YEAR 5 AFTER TAX CASH FLOW = SALE PRICE - (SALE PRICE - BOOK VALUE)*TAX RATE

    ANNUAL CASH FLOWS YEAR 0 = - INITIAL PROJECT COSTS; YEAR 5 = AFTER TAX CASH FLOW + CASH INFLOW FROM SALE OF LAND + BLDGS&EQUIPMENT
    COST OF CAPITAL REQUIRED RETURN = DISCOUNT RATE
    NPV NET PRESENT VALUE OF ALL PROJECT CASH FLOWS
    IRR INTERNAL RATE OF RETURN, PROJECT GROWTH RATE SUCH THAT NPV = 0 ; PROJECT BREAKEVEN RATE
    RISK PREMIUM (IRR - COST OF CAPITAL) THE PROJECT RETURN, SPREAD, OVER AND ABOVE WHAT IS REQUIRED TO BREAKEVEN
    2.50
    200,000
    60%
    2.25
    125,000
    65%
    2.65
    275,000
    55%
    STEP 2.
    MANY UNCERTAIN VARIABLES EXIST IN OUR CATFISH PROBLEM.
    WE WANT TO DETERMINE WHICH HAVE THE MOST IMPACT ON THE NPV / IRR .
    FOR EXAMPLE, REDUCE THE SELLING PRICE OF LAND - 10% AND NOTE THAT IRR DROPS FROM 13.8% TO 13.2% .
    WHEREAS REDUCE THE PRICE PER POUND , FROM $2.50 TO $2.25, WE FIND THE IRR DROPS FROM 13.8% TO 11.4% .

    QUESTION: DETERMINE WHICH HAVE THE MOST IMPACT ON NPV ?


    SET UP SEVERAL DATA TABLES BASED ON PERCENT CHANGES OF OUR UNCERTAIN VARIABLES,
    GRAPHIC COMPARISON IS HELPFUL.

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