Task 2:

Based on the hypothetical scenario information (further below), provide the CEO with your evaluation and recommendations on the proposed project.

Guidance points:

Analyse base case (expected) cash flows and their potential uncertainty.

For your base case analysis, calculate the five investment decision criteria (NPV, IRR, Profitability index, Payback period, Discounted payback).

Recommendations should address the decision suggested by your base case, along with further follow up or other matters that the company should consider prior to making a final decision. These additional recommendations should be based on an aspect of your analysis and/or the case information.

The main body of your evaluation should provide summary metrics only, with detailed cash flows shown in an Appendix (a readable screenshot from your spreadsheet down to and including the net cash flows line).

Within the main body, you are advised to use tables and/or figures to assist decision makers in quickly seeing main points and to visualise your analysis results. However, ensure the key point of each table or figure is self-evident or discussed/explained in the text.

Scenario:

Omirp Ltd is a profitable company that manufactures meat products. In recognition of growing

consumer interest in more environmentally responsible and healthy foods, the companys

board has asked for new product proposals to create value from these trends.

One of these proposals, if implemented, would represent a radical shift in the companys

product offerings: a plant-based protein product, called Ahead of Steak, which is very similar

in appearance, taste and texture to beef. Ingredients include potato, soy and pea proteins. The

company has paid $200,000 for development of this product.

The project team that has been working on the proposal expects only a five-year life for the

product because innovations in plant-based proteins are rapidly evolving. Based only on desk

research, the team has roughly estimated $2,000,000 in first year sales revenue with the

annual growth rate expected to be 20%. The team leader anticipates that the Ahead of Steak

product will decrease sales of the companys meat products as some existing customers

switch to the new product. The impact of this is estimated to be an annual decrease of

$500,000 in the pre-tax profit of the companys other products each year of the Ahead of Steak

project life. However, the remainder of the team believe that the company is going to lose

customers and an equal amount of profits to other companies that produce plant-based

protein products if the company does not go ahead with the project.

The variable costs related to the project are estimated to be roughly 55% of sales revenue

while additional selling, general and administrative costs (excluding depreciation) are a much

more certain $400,000 in the first year and, from year 2, will increase by 3% per year in line

with government CPI forecasts. Based on company standards, net working capital needs for

the project will begin upfront and be 15% of the next years forecast sales revenue. In the final

year of the project, all remaining net working capital investment will be recovered.

Quotes for new equipment to manufacture the product have come in at $1,200,000. The

equipment will be depreciated based on at 20% per year (based on tax office guidelines) using

the prime cost method and sold at the end of the final year of the project for $150,000, net of

dismantling costs. A 30% tax rate applies to Omirp Ltd and, for project analysis purposes, all taxes are assumed

to be paid in the year of income to which they relate. Omirps WACC is 11%.