The board of Directors of your company has outlined the following strategic objectives for the financial year July 2021 June 2022 To increase net profits by 25%

To improve the companys image in its key markets

In order to achieve these objectives, the board has approved a capital expenditure budget of $200m with the following criteria for project approval Projects must have a positive NPV Projects must provide a minimum 20% return on investment to be considered for approval, except where they are intended to mitigate significant occupational health and safety, or reputational risks Projects must have a minimum payback of 3 years except where they are intended to mitigate significant occupational health and safety, or reputational risks, in which case payback must be at least one year before the project terminates The Companys current cost of capital is 8% Your team has been given the responsibility to identify projects that will achieve the strategic objectives and investment criteria outlined above. After conducting extensive research, the team has identified the following investment options for board consideration and approval.

Project A: Introduce a new line of freshly squeezed juices to the market. Market research has shown that the 18 35 year old young professional segment of the population has become more health conscious and are increasing their demand for fresh unprocessed foods. This market is estimated at 2 million litres of juice annually and is currently served by one large scale supplier and a few juice bars across the country. The research also indicates that the market is currently under-served with approximately 50% of current demand being satisfied, including only 10% of the demand in the western region of the island. The team believes that with the companys superior record of quality and freshness, as well as its distribution strength, it will be able to capture and gradually increase its share of this market overtime The Proposal The team is proposing that the company extends its product range to include the manufacturing and distribution of freshly squeezed juices. The team has identified a suitable juice squeezing and bottling line with a purchase price of $100m and installation cost of $10m. The squeezing and bottling line has an estimated 5 year useful life after which it can be sold through a used equipment brokerage company in the USA for $3m. The company would however have to spend $750,000 to disassemble and ship the equipment to the brokers. Annual depreciation for the new squeezing line is $22m. The team is considering two options for manufacturing and distributing the new line of juices

Option 1 Install the new squeezing and bottling line at the companys current location in St Catherine and outsource the distribution of juices in the western parishes. The company will upgrade the 3 trucks currently being used to distribute other juices to the western parishes and use these trucks to distribute the freshly squeezed juices in the eastern and central parishes. The projections for this option are detailed below:

Year 1 Year 2 Year 3 Year 4 Year 5

Market Share 20% 25% 35% 45% 55%

Price per Litre $300 $300 $330 $330 $350

Manufacturing Cost per Litre $200 $180 $180 $190 $200

Outsourced Distribution Cost per Year $2m $2.5m $3.5m $4.5m $5.5m

The 3 trucks will be upgraded at the implementation stage of the project at a total cost of $600,000. The current annual operating cost of the companys fleet of trucks is $7.5m but this is expected to decrease by $1million annually due to the shorter distances to be travelled with the implementation of the project. The company will convert an existing warehouse to a factory space for the new squeezing line. The company will transfer inventory stored in this warehouse to warehouse space it currently rents for $1.2m annually. The additional cost for storing the inventory transferred will be $600,000 annually from year 1 year 3, and $720,000 in year 4 and 5. The new squeezing line will be supervised by the existing plant supervisor and plant manager who currently earn at total of $7.5m annually. In addition to his current salary, the plant supervisor will receive a volume incentive of $0.20 per litre of freshly squeezed juice produced and sold.

Option 2 Install the new squeezing line in Hanover and invest in new trucks for island wide distribution of the freshly squeezed juices. The projections for this option are detailed below

Year 1 Year 2 Year 3 Year 4 Year 5

Market Share 25% 30% 35% 45% 55%

Price per Litre $300 $300 $330 $330 $350

Manufacturing Cost per Litre $180 $162 $162 $171 $180

In addition to the cost of purchasing and installing the squeezing line, it will cost the company $500,000 to transport the equipment to Hanover. The company will purchase five new refrigerated trucks at the implementation stage of the project, at a total cost of $50m. The annual operating cost of these trucks is projected to be $5m annually in years 1-3 and 6m in years 4 and 5. Annual depreciation is estimated $15m The company will rent a factory building at a cost of $6m annually for 5 years. Based on the terms of the proposed lease the company will pay the landlord $2m at the end of the lease to restore the building to its original state. The company will hire a production Manager, a Production Supervisor and a Distribution Manager in Hanover at a total cost of $11m annually

Project B Design and construct a waste water treatment facility to treat factory waste. The company has been repeatedly cited for environmental breaches over the last 2 years, for failing to effectively manage its waste and posing a river pollution threat in the area it operates. There has also been some amount of negative social media postings from residents in the area, posing growing reputational risk to the company. The team has approached a German company to request a proposal for a waste water system that will separate and treat water from the factory waste. The details of the proposal are outlined below: A proposed system can be designed and implemented a projected cost of $25m. However, prior to the design and implementation, a consultant would need to visit the factory for an assessment. This will cost the company $700,000 in airfare and accommodation, and an additional $800,000 in consultancy fees. The proposed system is estimated to have a useful life of 7 years and annual depreciation of $4.5m The projected operating costs of the waste water system is $1.2m annually in years 1-4 and $1.5m annually in years 5 - 7 On implementation of the proposed waste treatment system, the company will save $1.5m it currently spends annually on purchasing chemicals used to manually treat the waste water. The company will also save $3.6m it currently pays annually to the municipal authority as fines and penalties for river contamination The companys farm manager has indicated that the separated dried waste can be used as organic fertilizer in the companys orchards. This is estimated to save the company $1.5 annually in fertilizer cost. In addition, the treated water will be recycled through the irrigation system saving the company another $400,000 in annual irrigation costs Required

Part A 12 marks Evaluate the projects above and prepare a capital expenditure proposal for your Board of Directors, including investment recommendations. Recommendations should be supported by the relevant financial analyses with clearly identified cash flows for each year Recommendations should be supported by an outline of any non- financial factors you think the board should consider

Part B 5 marks Identify possible risks to your proposal in Part A and evaluate the impact of each risk on your proposal. Advise your board on the actions to be taken to manage the identified risk.

Part C 3 marks Advise your board on the possible financing options for the capital budget, outlining the companys advantages and disadvantages of each