INSTRUCTIONS
Based on the background
below, you will undertake a Free Cash Flow Analysis, calculate the NPV and IRR
and Payback periods and recommend a course of action for the Board and CEO of
A2Milk (Australian company).
You will also need to
create a presentation – no more than ten minutes, where you will have to
present and speak and submit an Excel Spreadsheet that supports the
presentation.
BACKGROUND
Your team has been created to undertake research and
deliver a presentation with a recommendation to the CEO that will be sent
through to the Board of Directors (BoD) with a recommendation in relation to the
following scenario:
The “A2M” BoD is looking to vertically integrate the business by
acquiring one of its current suppliers.
The CEO has delegated your cross functional team to perform a screening
process amongst the best dairy farms in Australia with the goal of selecting
potential candidates and presenting a case to the CEO for the strategic goal.
Your team’s research, travel and accommodation has cost A2M $100,000.
In this research your team has identified two dairy farms that fit well
with the “A2M” business model.
Project A has an initial outlay of dollars $100 million and Project B
has an initial outlay of $150 million.
Project A will produce 85,000,000 litres of milk starting at the end of
year 1 until the end of year 5 and 50,000,000 litres of milk starting at the
end of year 6 until the end of year 10. It will also incur working capital
expenses at the end of year 6 to 9 of $5 million (this working capital will not
be recovered).
Project B will produce 100,000,000 litres of milk starting at the end of
year 1 until the end of year 10. It will also incur working capital expenses at
the end of year 1 to 3 of $2 million (this working capital will not be
recovered).
Assume that the average selling price (farmgate price) of a litre of
milk is $0.50 over the ten years. The operating costs of both projects will be
30% of the revenues from year 1-10.
Both investments will be depreciated on a straight-line basis over ten
years to 0 book value. “A2M” has estimated that the dairy farms can be sold at
the end of year 10 respectively for $50 million (Project A) and 75 million
(Project B).
The tax rate is 30%. All cash flows are annual and are received at the
end of the year.
The weighted average cost of capital for both projects
is 10% and “A2M” management payback rule is 6 years.
The
farmgate price can fluctuate, so the CEO would also like to see what the effect
would be if the prices does decrease or increase by 40%.
What
are some of the non-financial risks that may occur in line with the Board
strategy?
How do I submit?
The Excel Spreadsheet must contain all the calculations.
The Presentation must be in powerpoint and must include
the references list.
Research material can be included in a Word document to provide evidence to professor that I have done the work myself
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