BFA728, Advise Angelina and Brad on their Decision
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UNIVERSITY OF TASMANIA
Finance (BFA728)
Added on 2020-02-18
BFA728, Advise Angelina and Brad on their Decision
UNIVERSITY OF TASMANIA
Finance (BFA728)
Added on 2020-02-18
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1.Advise Angelina and Brad on their decision about accepting or rejecting the project.For expansion, Rosanna Roses will require about a hectare of land. The project will last for 10years since the project will not be sold, owing to the fact that Brad and Angelina will stay thereafter their retirement that is 10 years from today. In addition, the project development cost willbe seventy-thousand dollars, which is a sunk cost already incurred and thus should be ignored.Marketing consultant cost for the report will cost five thousand dollars, which shall, nevertheless,be ignored since the service has already been availed and the cost would still be incurredirrespective of the decision. Development and testing period will be 1 year, whereas plantation tocommercial period will be 3 years. This directly implies that the start of commercial phase willbe the fourth year, and will last till the tent year from today. Hence the effective period of sale isexactly seven years.Initial costThe initial pre-tax cost will entail land clearing cost, fertilizing cost and OPEX, wherebyOpenX for further development and stock production will be $140,000, and will Last a total of12 months, that is 6 months for development and the other 6 months for testing (Weygandt,Kimmel and Kieso 2013). Land clearing cost will be twenty thousand dollars, while fertilizingcost will be one thousand dollars, and it is important to note that clearing and fertilizing wouldoccur the day roses are taken out of planting, and that is one year from now.Equipment costThe existing equipment cost ninety thousand dollars, which should be ignored since it’salready incurred. The remaining depreciation on the machine will, however, be used for taxbenefits (Nobles, Mattison and Matsumura 2015). The life remaining is 5 years, and the WDV
cost is $45,000 dollars based on depreciation by prime cost method over 10years, whereby 5years are still left.Greenhouse costThe total greenhouse cost will be $107, 000 for which there will be no any depreciationbenefit. The cost is broken down into slab cost, material cost and labor plus insurance costs. Theslab cost will be $35,000 while the material cost will be $60,000. Labor and insurance will cost$12,000.Storage system and watering systemFor storage of the roses, the rack equipment cost will be $7,000 and the equipment lifewill be 3 years depreciated over straight line method (Nobles 2015). The watering systemequipment will cost $6,000 inclusive of installation cost. The watering system will have a life of4 years which will also be depreciated over straight line method.Cost during plantation phaseFrom the point of installation onwards, the following will be the cost; Annual cultivationcost of $10,000 per hectare, Annual pest control cost of $5,000, fertilizer cost of $500 perannum, annual cost of cutting and picking will be $3,000, annual marketing cost of $20,000during the first three years of sales, annual marketing cost of $4,500 during the fourth year ofsales, marketing consultant cost of $5,000, and box delivery charges of $25 per box. It ismomentous to note that the annual labor cost and the annual marketing costs would be incurredonce the roses are cut and packed into boxes from year 4 onwards, while the marketingconsultant cost will be the agency cost for the new project, which inn absence of information, hasbeen assumed from year 4 onwards.
123456789101112$- $(140,000.00)$(16,500.00)$(15,500.00)$(15,500.00)$(56,000.00)$(61,000.00)$(73,500.00)$(65,500.00)$(63,000.00)$(58,000.00)$(53,000.00)EBITDACommercialSales informationThe existing sales have recorded an annual loss of $30,000. However it is projected thatover the 10 years, both the number of boxes sold and the price per box will be increasing to apeak value of 1,500 boxes in the fourth year and then deteriorate gradually, forming a normalcurve. For potted roses, an estimate of 1,000 potted roses would be sold at the end of the 10thyear from today, with the price per potted rose being $50. Each pot will cost $10 while thedelivery charges per pot will be $4. Therefore, the pre-tax net realization per pot will be $36,while the post-tax net realization will be $21 per pot. The growing costs for the potted roses willbe the same as it would incur for cut-flower market.
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