MP124 Corporate Finance: Evaluating Auscann's Reef Magic 4 Acquisition

This case study analyzes Auscann Group Holdings Limited's potential acquisition of Reef Magic 4, a tourism operator. A financial analysis was conducted, focusing on Net Present Value (NPV) to evaluate the proposed acquisition. The analysis considers initial outflows like capital expenditure on a vessel, increased working capital, and AMSA certificate costs. Inflows include revenue from ticket sales, reduced costs, and terminal cash flow, while sunk costs and irrelevant data are excluded. The NPV calculation, discounting cash flows at 14%, indicates a negative value, suggesting the project is not financially viable unless the ticket price is above $231. The recommendation is to reject the project due to its high negative NPV.

1Strictly Privileged and Confidential
MP 124 CORPORATE FINANCE
AUTUMN 2018
GROUP ASSIGNMENT
1.0 Background
1.1 Auscann Group Holdings Limited is a listed entity on Australian Stock Exchange. The
company is headquartered in Perth. The company is considering diversification by
acquiring Magic Mushroom Tours, a tourism operator stationed at Cairns. Further, the
company is considering acquisition of Reef magic 4. In this regard, a financial analysis
has been undertaken whereby the proposed acquisition prospects have been analyzed
in terms of Net Present Value (NPV) after considering the proposed outflow and
inflow of the proposed expansion. Further, opportunity cost has been taken into
consideration while evaluating the NPV and sunk cost are avoided as they are not
significant in decision making.
1.2 Outflow:
Initial outflow of resources comprise capital expenditure on acquisition of vessel,
increase in working capital and AMSA certificate. The net outflow in Year zero is
AUD 3,921,000/-. Refer Excel Solutions for detailed work.
The certificate cost has been considered initial outflow to be in alignment with Time
Value of Money.
1.3 Inflow in year 1 to 10
The revenue from sales of ticket from year 1 to 10 is major source of revenue.
Reduction in cost has been considered as income. The following elements have been
considered as cost:-
 Opportunity cost of Cairns Reef Fleet Terminal;
 Wages;
 Depreciation on Reef Magic;
 Fixed Operating Expense;
 Fuel Expense;
 Annual Repair and Maintenance;
Further, following factor has not been considered for the purpose on analysis :
 Sunk Cost i.e. report cost;
 Data in Para 6 of the questionnaire (Not a relevant cost);
 Payment of dividend;
 Accounting depreciation as tax depreciation has been considered;
 Account Payables
Further, with respect to para 13, the answer to the enquiry by the Managing director is
no and the food expense is not an opportunity cost.
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2Strictly Privileged and Confidential
Further, it has been assumed that company is earning profit from other business as the
tax loss setoff has been considered for analysis.
1.4 Terminal Cash flow
Terminal cash flow is net of tax w.r.t the disposal value of assets and a decrease in
working capital requirement. Also, outflow with respect to ASMA certificate has been
considered.
1.5 Analysis
On the basis of above analysis, NPV has been computed by discounting the cash flow
@14% which tantamount AUD (3,101,244) and accordingly the project is not viable
as the present value of cash flows are negative from the view point of shareholder.
However, the ticket price above $ 231 can only make the project NPV negative and
hence if the company intends to profit from it, then it should ensure a minimum $231
as ticket price.
Comment: The project shall not be accepted as it high negative NPV.
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