Outline

Sweet Dreams is a well-established and successful wine producer with its vineyard located in the Gold Coast hinterland. The vineyard has 58 hectares of wine producing vines that, on average, produce 5,000 kilograms of grapes per hectare per annum. Their modern processing facilities yield a total of approximately 185,600 litres of wine each year. All wine is sold in the year of harvest and Sweet Dreams achieves an average wholesale price of $5.00 per litre across their wine varieties.

After many years of operations, the winerys grape harvester needs to be replaced. The production manager has investigated several harvesters and has narrowed the choice to two specific models: a Self-Propelling Harvester and a Tow-Behind Harvester. Relative to the harvester being replaced, both these models are more efficient in that they reduce crop wastage and have lower variable costs. An initial analysis of the two harvesters conducted by the production manager indicates that the Tow-Behind Harvester should be purchased as its capital investment and overhaul costs are much lower than those for the Self-Propelling Harvester.

The vineyards owner, Mr. Bob, is not satisfied with the analysis as he believes it is too simplistic. As such, he has provided you with some detailed information related to the decision to replace the harvester and has asked that you complete the following task.

Task

Provide a detailed financial analysis of both harvesters, noting that Mr. Bob plans to replace the chosen piece of machinery at the end of its life. In addition, you are to write a detailed but concise report relating to the analysis and provide a recommendation on which harvester to purchase so that Mr. Bob can discuss this with the production manager. In completing this task, Mr. Bob has specifically requested the following:

The financial analysis is to be completed in Excel. The file is to be easily adjustable for different scenarios (interactive spreadsheet) and you must use the Analysis of Harvesters.xlsx sheet provided as your input sheet.

The analysis of each piece of machinery should be conducted on separate sheets.

The report is to be short (600 words + 20% tolerance) and written in a manner that can be understood by a person with limited knowledge of financial analytical tools. It should also have the following sections:

Summary

Methodology this section must explain and justify the methodology chosen for the financial analysis. NOTE: Do not list/describe the steps of the analysis.

Recommendations and Limitations.

All cash flows are assumed to occur at the end of each year, except for capital outlays which occur at the beginning of the year General Information on Vineyard 7 8 Size of vineyard (ha) 58 Current production of grapes per hectare (kg) per annum 5,000 Juice yield per 1000 kg of grapes (lt) 640 1 Current juice yield (lt of wine) 185, 600 Wholesale price per litre of wine in 1st year 5.00 3 Price inflator for wholesale price (applied from 2nd year 2.25% 4 Variable costs per kg of grapes production $1.75 9,750.00 15 Fixed costs per hectare Option A SELF-PROPELLING HARVESTER, 8 Capital expenditure 9 Life of harvester (years 15 Increase in productivity 11.50% 21 Decrease in variable costs 5.00% 22 Depreciation method SL $50,000.00 Salvage Value This machine requires a overhaul every 3 years, expensed $95,000.00 24 immediately for tax purposses excluding the last year of operation) 25 26 Option B TOW-BEHIND HARVESTER 28 Capital expenditure 9 Life of harvester (years 10 30 Increase in productivit 9.50% Decrease in variable costs 3.00% 2 Depreciation method SL $65,000.00 33 Salvage Value This machine requires a overhaul every 5 years, expensed $50,000.00 4 immediately for tax purposes excluding the last year of operation. 35 36 37 Information Pertinent to Both options Additional working capital required (WC is recovered at 38 the end of the life of the harvesters) 39 Company tax paid in the same year of income) 3086 0 Discount rate 12% 2 All cash flows are assumed to occur at the end of each year, except for capital outlays which occur at the beginning of the year General Information on Vineyard 7 8 Size of vineyard (ha) 58 Current production of grapes per hectare (kg) per annum 5,000 Juice yield per 1000 kg of grapes (lt) 640 1 Current juice yield (lt of wine) 185, 600 Wholesale price per litre of wine in 1st year 5.00 3 Price inflator for wholesale price (applied from 2nd year 2.25% 4 Variable costs per kg of grapes production $1.75 9,750.00 15 Fixed costs per hectare Option A SELF-PROPELLING HARVESTER, 8 Capital expenditure 9 Life of harvester (years 15 Increase in productivity 11.50% 21 Decrease in variable costs 5.00% 22 Depreciation method SL $50,000.00 Salvage Value This machine requires a overhaul every 3 years, expensed $95,000.00 24 immediately for tax purposses excluding the last year of operation) 25 26 Option B TOW-BEHIND HARVESTER 28 Capital expenditure 9 Life of harvester (years 10 30 Increase in productivit 9.50% Decrease in variable costs 3.00% 2 Depreciation method SL $65,000.00 33 Salvage Value This machine requires a overhaul every 5 years, expensed $50,000.00 4 immediately for tax purposes excluding the last year of operation. 35 36 37 Information Pertinent to Both options Additional working capital required (WC is recovered at 38 the end of the life of the harvesters) 39 Company tax paid in the same year of income) 3086 0 Discount rate 12% 2