A Trump

De Tomato

Ltd (

TDT

) is a company in aquacultural industry specialised in farming of aquatic

organisms.

TDT

is considering opening a new farm in

Sandy

Bay

. This project would involve the

purchase

of 1

3 hectares

land

at a price of $

1,000,000

(Note that: The land is not subject to depreciation for accounting

and tax purposes)

. In addition to that, the company will need to purchase eight special

equiments which cost

$125,000 each. The equipments are expected to be in use for 5 years and after that, they will be scrapped

without any residual value. Each year, each of these equip

ments will incur $5,000 maintenance cost.

It is

assumed that the farm

will first be used at the beginning of the next financial year: 1 July 2022.

Before starting this new operation, T

DT

will need to redevelop and renovate the warehouse

at the farm

. This

is expected to cost $2

00,000. Assume that

TDT

is not able to claim any annual tax deduction for the capital

expenditure to the renovation of the building until the business is sold.

Revenue projections from the farm

for the next five years are as follows:

Year 1

Year 2

Year 3

Year 4

Year 5

Beginning

1/7/202

2

1/7/202

3

1/7/202

4

1/7/202

5

1/7/202

6

Ending

30/6/202

3

30/6/202

4

30/6/202

5

30/6/202

6

30/6/202

7

Production quantity (tons)

120

140

170

185

185

Price (per tons)

$

9,000

$

9,150

$

9,250

$

9,300

$

9,350

Operating variable costs associated with the new business including material costs and labour costs

.

Estimated material costs per ton in year 1 is $2,

000 and this cost will increase by 3.5% every year. The farm

will require about 6

workers working for 8

hours a day, 200 days per year. The pay rate is flat at $2

0/ hour

including superannuation. Annual operating fixed costs

associated with production (excluding depreciation)

are

$100,000. Existing administrative costs are $550,000 per annum. As a result of

the new operation, these

administrative costs will increase by 30%. The company is subject to a tax rate of 30% on its profits.

Meanwhile,

TDT Ltd

is currently financed by 60% of equity and 40% of debt. Company's bond is traded at

a price of $980. The bond has 10 year term, 8% coupon rate paid semi

-annually and face value of $1,000. In

addition,

company's equity has a beta of 1.2 while the risk-

free rate in the market is 3% and market portfolio

return is estimated to be 12%.

P. De Potato

, the company CFO

would like you to help him

examine the viability of the project for the next

five years, taking into account the projections of sales and operations costs prepared by company's

accountants.

BFA

503 - Introduction

to Financial Management

Your tasks:

Part 1

Based on the information in the case study, P. De Potato

has asked you to write a report to T

DT

's management

advising them as to the best course of action regarding this project. Your report should address the following

specific questions asked by management:

8.

Produce an estimate of change in cost of equity (and discount rate of the project) given the current situation of COVID-19 in Australia. How the NPV of the project would change? What is your recommendation?