7251AFE: Griffin Case Study - Gold Coast Water Company - Accounting and Finance Assignment Help

ASSSIGNMENT TASK:

Task #1: Griffin

Role and Context

You are a financial analyst in the capital projects department of Griffin, a speciality chemicals producer of fire-control chemicals, additives, and pesticides based in Queensland. Currently, Griffin is small in scale but embarking on a rapid expansion and modernization program. It is also expanding its range of products into dyes, rubber compounds, and water treatment chemicals. Along with the projects considered here, Griffin
is also currently undertaking evaluation of projects expanding its existing facilities in SE Queensland, the acquisition of another chemical producer in Victoria, a joint venture with a US company producing fuel additives, and various production and warehouse upgrades in a few smaller plants in NSW and South Australia. While Griffin has a large and expanding capital budget, it is currently considering which of two possible projects it should invest in, both of which will be used to manufacture furfural (an organic compound derived from agricultural by-products) and furfural-based derivatives to make resins, urethanes, and refining solvents over a 10-year operating period.
 

Scenario

The first project, the Djakarta Plant, is a proposed new plant in Indonesia, about 40 km outside the capital.Griffin has been considering this expansion for many years and believes that the combination of low wages, looser environmental protection, and proximity to its emerging markets in SE Asia will makes this new plant an attractive addition to its existing facilities. Specifically, now, in 2019 the Djakarta Plant will require the purchase of land for $3.55 million, with development and construction building costs of $20 million, and plant and equipment of $4 million. Griffin will also need to spend on working capital each year. The change in net working capital is an increase of $100,000 plus 3% of sales every production year during the life of the project (the exception being the return of all the previous working capital in the last year of the project). Sales are estimated to be $45.6 million in 2020, the first year of production, increasing by 11% per annum after that. The cost of goods sold is 50% of sales. Fixed costs will be $5 million in 2020, increasing by 4% per year. Both buildings and plant/equipment will be depreciated straight line to zero over the 10-year project life.

Task
Provide a report to Griffin’s CFO, Ms. Kirsten Robertson, recommending in which of these two mutual exclusive projects Griffin should invest, if any. Assume Griffin has a cost of capital of 11% for domestic projects and 17% for international projects.

Task #2: Gold Coast Water Company

Role and Context

You are a newly hired financial analyst with Gold Coast Water Company (GCWC), a company operating in Queensland, which specialises in bottling purified water sourced from Tambourine Mountains springs.GCWC is considering adding to its product mix a ‘healthy’ bottled water geared towards children, aimed at improving both its business focus and the return to shareholders.
 

Scenario

GCWC currently has 50,000,000 ordinary shares outstanding that trade at a price of $35 per share. GCWC also has 400,000 bonds outstanding that currently trade at $983.38 each. The company’s bonds have 20 year to maturity, a $1,000 par value and a 10% coupon rate that pays interest semi-annually. GCWC has no preferred equity outstanding and has an equity beta of 2.21. The risk-free rate is 2.5% and the market isexpected to return 10.52%. GCWC has a tax rate of 34%.

The initial outlay for the new project is expected to be $5,000,000, which will be depreciated over the next 3 years using the straight line method to a zero salvage value, and sales are expected to be 1,550,000 units per year at a price of $2.05 per unit. Variable costs are estimated to be $0.62 per unit and fixed costs are estimated at $75,000 per year. The above estimations are valid for 3 years of project life after which a terminal value of $580,000 in year 3 is expected to cover all cash flows to be earned in the future. For the purpose of this project, working capital effects are ignored.

Task

The CEO and CFO have decided to rely on your newfound expertise as to provide a recommendation on why the company’s WACC should not be used, and if not, what is the appropriate discount rate to be used in the appraisal of the new project. Concerned about the forecasting risk of this project, they also ask that you perform a risk evaluation in the form of:
 

- Sensitivity analysis for sales price, variable costs, fixed costs and unit sales at ±10%, ±20%, and ±30% fromthe base case, showing on a graph which variables are most sensitive;
- Scenario analysis on the following two scenarios:

a) Worst Case: selling 1,250,000 units at a price of $1.75 and variable cost of $0.68 per unit;
b) Best Case: selling 1,750,000 units at a price of $2.25 and variable costs of $0.49 per unit.

Based on the above analysis provide a recommendation whether GCWC should invest in this project.

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