Capital Budgeting with Staged Entry
A – Even though Atlantic Aquaculture already bought the land needed for 300,000 USD, its value today is 900,000 USD. We can therefore conclude the 900,000 USD is an opportunity cost as the land can be sold at this value.
B – In this case it is best for the company to use the option to the land acquisition. By calculating the NPV the option is worth $-852,093.66. Buying the land without the option would bring the company back to $-900,000.00. We used a discount rate of 6%, as this is linked with the appreciation of the land annually. The calculation of the NPV can be found in Appendix A.
A – The R&D cash flows are $48,000 annually for the years …show more content…
Decreasing initial demand to 60% and high growth possibilities to 50% simultaneously, leads to a decrease in expected NPV, while increasing standard deviation and the covariance leading to a lower risk- return payoff. Furthermore, one can observe that in absolute and in relative terms, the impact on the small plant of increasing/decreasing initial demand and growth opportunities does not have as a great influence as on the large plant.
A sensitivity analysis can help to underline the most important factors affecting the success of a firm or a project. In this case we have articulated success in terms of NPV and have used input factors such as variable costs, units sold, sales price and WACC). With respect to the two different plants one can observe that NPV is relatively more sensitive to the mentioned factors in the case of the small plant. Furthermore, regarding the line of sales prices one can see that this is by far the line with the highest positive slope (coefficient), while fixed costs has the shallowest slope. The interpretation therefore is that sales prices have the biggest impact on expected NPV. Furthermore it is worth mentioning that the slope (and the impact) of WACC is quite high (negative) for