Question
Question One TradeFarms is a farming company based in Chambia country, plans to cultivate 135 hectors of farm land in Zambia. The farm equipment is
Question One TradeFarms is a farming company based in Chambia country, plans to cultivate 135 hectors of farm land in Zambia. The farm equipment is to be purchased at a cost of K1,680,000. Initial working capital is required at 10% of the cost of farm equipment. One type of plant will be cultivated, with the following expected annual sales in tonnes: Year 1 2 3 4
Moringa: | 2800 | 3500 | 3900 2500 |
Product will be cultivated in the year of sale. Product financial information is as follows: | |||
Moringa | |||
Selling price: | K330 | ||
Variable cost: | K185 | ||
Selling prices and variable costs are in current price terms. Inflation is given as follows: Selling price: 3.% per year | |||
Variable cost: | 1.% per year. | ||
General inflation 2.% per year | |||
Working capital inflation | 2.00% per year |
Fixed farm costs of K800,000 per year will be incurred in current price and will inflate at 2.% per year. TradeFarms pays profit tax one year in arrears at an annual rate of 30 %. The company can claim tax allowable depreciation on the purchase cost of the farm equipment on a straight line basis with no balancing charge/allowance. The farm project will be financed entirely by debt. 60% will be raised through company normal borrowing channels at cost of 8% and the balance at government subsidised rate of Treasury bill rate of 3.8% plus 120 basis points in Chambia. Issue cost will be 2% of the gross amount required. The market risk premium is 6%. The asset beta is 1.2 Chambia currency is peso and the current exchange rate between Chambia peso and ZMW is given as 0.682 pesos / K1. The annual inflation rate in Chambia is 3%. The project will pay management fees to head office of 180,000 pesos every year with an annual inflation rate of 2%. Tax in Chambia is paid at 30%. Required: a) Calculate the Adjusted Present Value in pesos and advise on the projects financial acceptability (40 marks) b) Using the base case NPV variables, Calculate the following: i. Modified Internal Rate of return (5 Marks) ii. The Macauley Duration (5 Marks)
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