Financial Management

Executive Summary of Investment Proposal Analysis

John is 40 years old and has inherited a 125-ha farm in the Mildura region of North West Victoria. John’s has a plan for a new career as a commercial grape grower for the Victorian wine industry. He would begin by registering the farm as a limited liability company, called McKenzie Estate, with himself and his wife as shareholders.

He has the gathered lot of information for the calculation of NPV for this Investment option.

Data

Total Ha available in farms

125

ha

Farm allocation

House

 

5

ha

Shiraz Vines Plant

50

ha

Chardonnay vines

40

ha

Sauvign Blanc Vine

30

ha

 Moreover, Considering the risk which might be there in the investment he has created two risk scenarios as :-

Scenario 1

Bad frosts occur in the Mildura region from time to time. Frost can destroy 20% of grape harvests once every 5 years, and 50% once every 10 years.

Scenario 2

The price volatility of wine grapes is another important risk. Appendix C contains historical price data for the three grape varieties planned for McKenzie Estate. You should use that data to construct reasonable scenarios for analyzing the sensitivity of the NPV of the proposal to grape prices. The easiest way to do this is by varying the rate at which wine grape prices are expected to appreciate in the future

There are few assumption taken to calculate these three option:-

  • 5th Year is the year of production so there will not be any change or loss of 20 % it will start from 10th year when production duration will be for 5 years (i.e. 10th Year)
  • Production will be as usual after that i.e. normal and there will be increase as usual
  • Farm equipment sale is considered in year o itself and is deducted from the initial cash outflow to determine the net cash outflow.

Conclusion and Recommendation on Investment Proposal Analysis

Following is the outcome for the above scenario and base case:

Summary Table

Scenarios

NPV( $)

IRR

Remarks

Ranking

Decision Recommendation

Base Case

3310479

10%

No Change

1

Accept- First option

Scenario 1

2091597

8%

Production Change

3

Accept- Last option

Scenario 2

3005733

9%

Price Change

2

Accept- Second option

           

It can be concluded that overall investment will be positive investment and feasible option , but best scenario is the base case where IRR is also high i.e 10% , Second scenario is where only price change is there and last should be production change.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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