Valuation Case Gro-Green Industries As an analyst with Gro-Green you have been a
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Valuation Case Gro-Green Industries As an analyst with Gro-Green you have been assigned to study a potential new product for the firm; an all organic super charged fertilizer mix made from residual bio-solid waste materials that Gro-Greens' R&D; people developed for use on residential lawns. You have been given this assignment and are to report back your findings to the management team made up of financial and non financial managers. To this end your report should be written to such an audience in an understandable manner that demonstrates clearly your findings and recommendations. To get started you begin by gathering data for your analysis: Gro-Green's marketing manager has reported to you that he feels under this project the company can sell 25,000 bags in the first year and that volume will increase by 15% in each year thereafter for the next 3 years after which time the product will become obsolete when replaced by newer cheaper products. The selling price for each 25 lb bag will be 22.95. You determine through data provided by accounting that current assets under this project (receivables and inventories) would increase by $42,000 as the firm would need to extend additional credit to retailers and increase inventory levels. Also current liabilities (accounts payable and accruals) would rise by $34,000 as a direct result of taking on this program. The required equipment cost is $193,000, plus another $15,000 for shipping and installation. The production facility will be located in a currently vacant building the firm owns. Variable costs of production are estimated to be 72 percent of sales revenues. In your discussion with production management you found it interesting to learn that the actual input of raw materials and labor are estimated only make up a small amount of the total variable cost; about 25% of it, and remaining portion is related to cost of power (Electricity and Gas) required to process the bio solids into a finished bagged item ready for sale. Fixed costs (exclusive of depreciation) will be $85,000 per year. And the fixed assets of equipment and installation will be depreciated under MACRS with a 5-year life. (Refer to Appendix 12A table 12a-2 page 435 for MACRS depreciation rates.) When production ceases after 4 years, it is estimated the equipment will have a remaining market value of $15,000. As a firm Gro-Green has a current tax rate is 42 percent. At the time of taking on this project the firm has outstanding long term debt of 4,500,000 at an average borrowing rate of 6.2%. The firm has no outstanding preferred shares. And has equity of 8,100,000 with a required rate of return to investors of 12%. The firm is currently financed within its optimal capital budget structure. Now onto the Analysis: The aspects that should be specifically considered and discussed in your report back to management are as follows: a. What is the weighted average cost of capital to the firm which you will be using to discount cash flows at for your project? b. Find the required Year 0 investment, the annual after-tax operating cash flows, and the terminal year cash flow, and then calculate the project's NPV, IRR, MIRR, and payback. Assume at this point that the project is of average risk. c. Management expresses concern that some of the base-case inputs might be too optimistic or too pessimistic, and he wants to know how the NPV would be affected if these variables were all 20% better or 20% worse than the base-case level. In question are 6 variables: unit sales, sales price, variable costs, fixed costs, WACC, and equipment cost. Hold other things constant when you consider each variable, and construct a sensitivity graph to illustrate your results. Please see the capital budget model posted with this assignment as a helpful guide to parts B & C. d. From the analysis above discuss findings on part a & b and especially the results of NPV, IRR, MIRR and payback for this project. Make sure your discussions assist non financial managers in understanding how to interpret the results. e. As well discuss the sensitivity of the given variables in part C and how they may impact any decisions on this project. Particularly what potential risks and opportunities do we discover through such analysis? e. Also you learn there are additional facts about this project that need to be considered and discussed as for how they may potentially impact the NPV to this project. You learn from accounting that R&D; costs to develop the organic fertilizer formulation and production process for the new product were $30,000, and those costs were incurred and expensed for tax purposes last year. As well itExplanation / Answer
Our world is different than it was 100 years ago. We have developed many synthetic organic and inorganic chemicals to make our lives easier – and used them in a fabulously wide range of products. In fact, you could say, as some do, that we’re living in a toxic soup of these chemicals. And those chemicals are changing us. Some of the chemicals changing us are called “endocrine disruptors” (which we discussed in last week’s post) since they interfere with the body’s hormone balance, which confuses the body. Initially, they caused concern because of their links to cancers and the malformation of sex organs. Those concerns continue, but the newest area of research is the impact that they have on fat storage. It has been found that the developing organism (us!) is extremely sensitive to chemicals with estrogenic or endocrine disrupting activity and that exposure to these chemicals during critical stages of development may have permanent long-lasting consequences, some of which may not be expressed or detected until later in life.(1) But back to obesity, which is what we’re concentrating on this week. (I know it’s difficult to stay on task, because these chemicals are synergistic, have multi-dimensional effects and often degrade into different substances altogether). Nicholas Kristof, writing in the New York Times last weekend, talked about the results of a study which I found disturbing. Look at these two mice: The only difference between these mice: The one at the top was exposed at birth to a tiny amount of an endocrine-disrupting chemical. New York Times The only difference between these mice: The one at the top was exposed at birth to a tiny amount of an endocrine-disrupting chemical. New York Times According to Kristof, “they’re genetically the same, raised in the same lab and given the same food and chance to exercise. Yet the bottom one is svelte, while the other looks like, well, an American. The only difference is that the top one was exposed at birth to just one part per billion of an endocrine-disrupting chemical (2) . The brief exposure programmed the mouse to put on fat, and although there were no significant differences in caloric intake or expenditure, it continued to put on flab long after the chemical was gone.” Bruce Blumberg, a developmental biologist at the University of California, Irvine, coined the term “obesogen” in a 2006 journal article to refer to chemicals that cause animals to store fat. Initially, this concept was highly controversial among obesity experts, but a growing number of peer-reviewed studies have confirmed his finding and identified some 20 substances as obesogens. Manufacturers have already exploited obesogens by using them to fatten livestock, and by formulating pharmaceuticals to induce weight gain in grossly underweight patients. A study by Dr. Baillie-Hamilton presents the hypothesis that the current level of human exposure to these chemicals may have damaged many of the body’s natural weight-control mechanisms and that these effects, together with a wide range of additional, possibly synergistic, factors may play a significant role in the worldwide obesity epidemic.(3) And these changes continue generation after generation. It’s clear that the most important time for exposure is in utero and during childhood.(4) The magazine Scientific American recently asked whether doctors should do more to warn pregnant women about certain chemicals.(5) It cited a survey indicating that only 19% of doctors cautioned pregnant women about pesticides, only 8% about BPA (an endocrine disruptor in some plastics and receipts), and only 5% about phthalates (endocrine disruptors found in cosmetics and shampoos). Dr. Blumberg, the pioneer of the field, says he strongly recommends that people — especially children and women who are pregnant or may become pregnant — try to eat organic foods to reduce exposure to endocrine disruptors, and try to avoid using plastics to store food or water. “My daughter uses a stainless steel water bottle, and so do I,” he said. Endocrine disruptors are found in fabrics – Greenpeace did a study of 141 clothing items purchased in 29 different countries from authorized retailers. Endocrine disruptors were found in 89 of the 141 articles tested. According to the report: “Overall, a variety of hazardous chemicals were detected within the broad range of high street fashion textile products analysed. These covered a diverse range of brands and countries of manufacture. These results indicate the ongoing – and in some cases widespread – use of hazardous chemicals in the manufacture of textile products openly marketed to consumers.” It’s not clear whether most obesogens will do much to make an ordinary adult, even a pregnant woman, fatter (although one has been shown to do so). But what about our children, and their children? How does fabric processing impact my weight, or my child’s weight? Should I avoid certain processing chemicals in my own home? The government made a tremendous impact on public health when it outlawed lead in gasoline. Now we need to make those same hard choices about doing without some of the things we’ve learned to like but which we know to be impacting our health. Support the Safe Chemicals Act and spread the word. This is too important to ignore. [1] Newbold, R. R., Padilla-Banks, E., Snyder, R. J. and Jefferson, W. N. (2005), Developmental exposure to estrogenic compounds and obesity. Birth Defects Research Part A: Clinical and Molecular Teratology, 73: 478–480. doi: 10.1002/bdra.20147 [2] Newbold, R. R., Padilla-Banks, E., Snyder, R. J. and Jefferson, W. N. (2005), Developmental exposure to estrogenic compounds and obesity. Birth Defects Research Part A: Clinical and Molecular Teratology, 73: 478–480. doi: 10.1002/bdra.20147 [3] Baillie-Hamilton, PF, “Chemical toxins: a hypothesis to explain the global obesity epidemic”, Journal of Alternative and Complementary Medicine, April 2002, [4] Blumberg, Bruce et al, “Transgenerational Inheritance of Increased Fat Depot Size, Stem Cell Reprogramming, and Hepatic Steatosis Elicited by Prenatal Obesogen Tributyltin in Mice”, Environmental Health Perspectives, January 15, 2013. [5] Kay, Jane, “Should Doctors Warn Pregnant Women about Environmental Risks?”, Scientific American, December 10, 2012.
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