1. Conduct a differential analysis of the inflows and outflows greenhouse construction opportunity for the low (20%utilization) scenario to arrive at a net benefit. Show your work and explain your calculations.
2. Conduct a differential analysis of the inflows and outflows Green Prosper Acquisition opportunity for the low (40%utilization) scenario to arrive at a net benefit. Show your work and explain your calculations.
3. Identify the investments and calculate the return on investment (%) and payback period (in years) for these two options. Show your work and explain your calculations.
| Option | Greenhouse | Green Prosper |
| Return on Investment | | |
| Payback | | |
Construct a New Greenhouse HEXO considered building a new greenhouse, which would increase the company's annual production to 250,000 kg of marijuana. The greenhouse would cost $55 million and would be fully operational by the fall Page 6 9B20B006 of 2018. Miron believed that the new facility would operate at a utilization rate between 20 per cent and 30 per cent in the first fiscal year following construction. In the short term, HEXO aimed to sell primarily to the SQDC in order to establish itself as Quebec's largest seller of recreational cannabis. After achieving significant sales growth and developing a robust customer experience, HEXO would expand and sell through other provincial governments and private retailers in subsequent fiscal years. Miron believed that this strategy would enable HEXO to achieve greater economies of scale and to further reduce its costs so that it could produce a gram of marijuana for $0.88. HEXO estimated that it could sell its products for an average price of $3.50 per gram, with credit terms of net 30. Should the new greenhouse be constructed, HEXO would need to increase its workforce. Miron estimated that HEXO would need to hire 200 production workers to cultivate the plants. Each production worker would work for 40 hours per week at a wage of $19 per hour and would work 50 weeks per year. If HEXO operated at the higher capacity, it would require an additional 50 production workers. Regardless of utilization, HEXO would need four production managers, each receiving an annual salary of $55,000. It would also require four administrative employees and 10 security personnel, each receiving a salary of $35,000. All salaried employees would receive benefits amounting to 15 per cent of their salaries. Water, maintenance, and other consumables would total 20 per cent of sales, recurring marketing and promotional expenses would average 10 per cent of sales; and general and administrative expenses would average 5 per cent of sales. Research and development costs would increase by a factor of 100 from fiscal 2017. The greenhouse would require production equipment amounting to $18 million, and furniture and fixtures amounting to $90,000. To ensure the greenhouse was well protected, HEXO would invest $1.5 million in a new security system. The facility, production equipment, security cameras, and furniture and fixtures had a useful life of 20 years and would be depreciated using the straight-line method, with no residual value. HEXO hoped to lower its days of accounts payables to 60 days, and Miron believed all inventory would remain on-hand for an average of 90 days. Acquire Green Prosper Inc. Miron also considered increasing HEXO's production capacity by acquiring one of its competitors, Green Prosper Inc., which was based in Charlottetown, Prince Edward Island, and had the capacity to produce 80,000 kg of cannabis annually. Green Prosper Inc. was an appealing acquisition target: it had strong management in place and could provide distribution channels to customers in the Maritime Provinces, a region not currently serviced by HEXO. Green Prosper Inc. also had a wide selection of cannabis oils, a product area that HEXO had yet to incorporate within its house of brands." Green Prosper Inc.'s income was increasing, and its financial position had been improving over the past two years (see Exhibits 7 and 8). Miron knew that HEXO would need to pay a significant premium above the book value of Green Prosper Inc.'s equity. He estimated that Green Prosper Inc. would agree to an offer of $120 million for 100 per cent of the company. HEXO would amortize the cost of Green Prosper Inc.'s book value over 20 years. Since the stock market value of cannabis companies was at an all-time high, Miron wondered whether it made sense to acquire Green Prosper Inc. now or to wait for the market to cool and then acquire Green Prosper Inc. at a lower price. If acquired, Green Prosper Inc. would operate at a higher utilization rate of between 40 per cent and 50 per cent. The selling price per gram would be the same as that of the new greenhouse, but the cost to produce each gram would be slightly higher, at $1.50. Miron estimated that Green Prosper Inc.'s gross medical sales would increase by the same growth rate as in fiscal year 2017 and that the cost of goods sold would be the Page 7 9B20B006 same percentage of sales as in fiscal 2017. Recurring marketing and promotional expenses would be equal to 10 per cent of recreational marijuana sales, and general and administrative expenses would increase by a factor of five from Green Prosper Inc.'s 2017 income statement. Research and development expenses and working capital days would be the same as for the greenhouse opportunity. Miron estimated the acquisition would be completed in January 2019, and one-time legal fees would total $10 million. Construct a New Greenhouse HEXO considered building a new greenhouse, which would increase the company's annual production to 250,000 kg of marijuana. The greenhouse would cost $55 million and would be fully operational by the fall Page 6 9B20B006 of 2018. Miron believed that the new facility would operate at a utilization rate between 20 per cent and 30 per cent in the first fiscal year following construction. In the short term, HEXO aimed to sell primarily to the SQDC in order to establish itself as Quebec's largest seller of recreational cannabis. After achieving significant sales growth and developing a robust customer experience, HEXO would expand and sell through other provincial governments and private retailers in subsequent fiscal years. Miron believed that this strategy would enable HEXO to achieve greater economies of scale and to further reduce its costs so that it could produce a gram of marijuana for $0.88. HEXO estimated that it could sell its products for an average price of $3.50 per gram, with credit terms of net 30. Should the new greenhouse be constructed, HEXO would need to increase its workforce. Miron estimated that HEXO would need to hire 200 production workers to cultivate the plants. Each production worker would work for 40 hours per week at a wage of $19 per hour and would work 50 weeks per year. If HEXO operated at the higher capacity, it would require an additional 50 production workers. Regardless of utilization, HEXO would need four production managers, each receiving an annual salary of $55,000. It would also require four administrative employees and 10 security personnel, each receiving a salary of $35,000. All salaried employees would receive benefits amounting to 15 per cent of their salaries. Water, maintenance, and other consumables would total 20 per cent of sales, recurring marketing and promotional expenses would average 10 per cent of sales; and general and administrative expenses would average 5 per cent of sales. Research and development costs would increase by a factor of 100 from fiscal 2017. The greenhouse would require production equipment amounting to $18 million, and furniture and fixtures amounting to $90,000. To ensure the greenhouse was well protected, HEXO would invest $1.5 million in a new security system. The facility, production equipment, security cameras, and furniture and fixtures had a useful life of 20 years and would be depreciated using the straight-line method, with no residual value. HEXO hoped to lower its days of accounts payables to 60 days, and Miron believed all inventory would remain on-hand for an average of 90 days. Acquire Green Prosper Inc. Miron also considered increasing HEXO's production capacity by acquiring one of its competitors, Green Prosper Inc., which was based in Charlottetown, Prince Edward Island, and had the capacity to produce 80,000 kg of cannabis annually. Green Prosper Inc. was an appealing acquisition target: it had strong management in place and could provide distribution channels to customers in the Maritime Provinces, a region not currently serviced by HEXO. Green Prosper Inc. also had a wide selection of cannabis oils, a product area that HEXO had yet to incorporate within its house of brands." Green Prosper Inc.'s income was increasing, and its financial position had been improving over the past two years (see Exhibits 7 and 8). Miron knew that HEXO would need to pay a significant premium above the book value of Green Prosper Inc.'s equity. He estimated that Green Prosper Inc. would agree to an offer of $120 million for 100 per cent of the company. HEXO would amortize the cost of Green Prosper Inc.'s book value over 20 years. Since the stock market value of cannabis companies was at an all-time high, Miron wondered whether it made sense to acquire Green Prosper Inc. now or to wait for the market to cool and then acquire Green Prosper Inc. at a lower price. If acquired, Green Prosper Inc. would operate at a higher utilization rate of between 40 per cent and 50 per cent. The selling price per gram would be the same as that of the new greenhouse, but the cost to produce each gram would be slightly higher, at $1.50. Miron estimated that Green Prosper Inc.'s gross medical sales would increase by the same growth rate as in fiscal year 2017 and that the cost of goods sold would be the Page 7 9B20B006 same percentage of sales as in fiscal 2017. Recurring marketing and promotional expenses would be equal to 10 per cent of recreational marijuana sales, and general and administrative expenses would increase by a factor of five from Green Prosper Inc.'s 2017 income statement. Research and development expenses and working capital days would be the same as for the greenhouse opportunity. Miron estimated the acquisition would be completed in January 2019, and one-time legal fees would total $10 million
