FINANCE 251 Assignment: Zespri Ice Cream Project Financial Analysis

This report provides a comprehensive financial analysis of Zespri Group Limited's potential expansion into the frozen dessert market, specifically an ice cream project. The analysis employs several key financial techniques, including Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period, to assess the project's viability. The report calculates the NPV to be positive, indicating a potentially profitable investment, and the IRR is found to be higher than the cost of capital, further supporting the project's acceptance. The payback period is also evaluated, suggesting the project is financially sound. Additionally, the report includes a computation of the cost of capital and a sensitivity analysis to assess the impact of changing key inputs on the project's financial outcomes. Based on the findings, the report recommends that Zespri proceed with the ice cream project. All the calculations are performed using the information provided in the assignment brief and publicly available sources, and the report concludes with a reference list of the cited sources.

Running head: FINANCE
Finance
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Introduction......................................................................................................................................2
Net Present Value............................................................................................................................2
Description of key inputs, methods assumptions and estimates......................................................3
Internal Rate of Return................................................................................................................3
Payback Period............................................................................................................................4
Computation of cost of capital.....................................................................................................4
Sensitivity analysis..........................................................................................................................5
Recommendation.............................................................................................................................6
Reference.........................................................................................................................................7

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Introduction
Zespri Group Limited is the leader in marketing the kiwifruit on global basis. At present
the entity is considering expanding into the market of frozen desserts. Purpose of the task is to
analyse the potential for the ice cream project. The project will be analysed through using
various techniques including the NPV, payback period and IRR. The report will also carry out
the sensitivity analysis of different inputs and based on the outcome the recommendation will be
provided (Zespri.com, 2019).
Net Present Value
Net Present Value (NPV) can be said as the difference between the present value of cash
inflows and the present value of the cash outflows over a period of time. The usage of NPV
comes handy in the case of capital budgeting and also in the decision making process of the
project in accordance of investment (Yuniningsih, Widodo & Wajdi, 2017).
The formula of NPV can be said as:
NPV =∑
t=1
n Rt
(1+i)t
Here,
Rt= it means the cash outflow and cash inflow during a single period of time t
I= it is the return which can be earned
t= number of time period

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Net Present Value can be stated as positive and negative NPV value. When the project is
showing the positive value in respect to NPV then the company should approach for the project.
It is a very critical as the investment decision making is done on the basis of the calculation of
NPV. If the project fetch negative present value then it is feasible not to invest for the project
since it will incur loss in the future (Krüger, Landier & Thesmar, 2015). Considering the
computation of NPV for ice cream project of Zespri it can be identified that the NPV of the
project is 18.30198. Positive NPV is signifying that the project shall be taken up.
Description of key inputs, methods assumptions and estimates
Internal Rate of Return
Internal Rate Return is a metric system that is used to for budgeting purpose where it
estimates the profit which can be expected from a particular project. It is a discount rate that
helps to find the net present value of the project’s all cash flow. IRR also calculated by the same
formula by which NPV is calculated (Koziol, 2014). The formula of IRR is provided below: ‘
IRR=∑
t=1
T Ct
( 1+r ) t −C0=0
Here,
Ct= it means the cash outflow and cash inflow during a single period of time t
I= it is the return which can be earned
t= number of time period
C0=total initial investment

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It is stated that the higher the internal rate of return from the project the more desirable to
get take the project. If the IRR of the project is higher than the cost of capital the project is
accepted. In the given scenario IRR is 9.56% which is more than the cost of capital which is
signifying that the project shall be accepted (Zespri.com, 2019).
Payback Period
The payback period is the amount of time it takes to recover the cost of an investment.
The usage of the payback period is used by the managers and investors to make judgments on
their investments. The concept is mainly used in capital and financial budgeting. Due to the
payback period the investor or any kind of company can save the cost efficiently.The payback
period is computed through dividing the investment by the annual cash flow. The lesser the
payback it proves to be more desirable for the investment. Conversely, the longer the payback,
the less desirable it is (Koziol, 2014). Generally the project with payback period lower than
useful life of the asset is accepted. From the given scenario it can be identified that the project’s
payback period is 11.38 years which is less than the useful life of 14 years. It is signifying that
the project shall be accepted.
Computation of cost of capital
Cost of capital is computed as follows –
Ke = Rf + β ( Rm – Rf )
Where Ke = Cost of capital,
Rf = Risk free rate = 1.63%
Rm = Market risk premium = 4.38%

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β = Beta = 1.1
Therefore, Ke = 1.63% + 1.1* (4.38% – 1.63%) = 0.0466 or 4.66%
WACC (weighted average cost of capital)
WACC is calculated as follows –
WACC = E/V * Re +D/V * Rd * (1-Tc),
Where,
E/V = % of equity
D/V = % of debt
Re = Cost of equity = 4.66%
However, the company does not have any debt for the year ended 2018 and hence, it is
assumed that the cost of capital = cost of equity = 4.66% (Zespri.com, 2019).
Sensitivity analysis
Scenario Summary
Current Values:
Higher Discounting
Factor
Lower Discounting
Factor Base Case
Changing
Cells:
Discount
Factor 4.66% 6.00% 2.50% 4.66%
Result Cells:
NPV 18.27680832 12.08785002 30.85191014
18.2768083
2
IRR 10% 10% 10% 10%
Notes: Current Values column represents values of changing cells at
Time Scenario Summary Report was created. Changing cells for each
Scenarios are highlighted in gray.

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4.66% 6.00% 2.50% 4.66%
0
5
10
15
20
25
30
35
Scenario summary
NPV
IRR
Discounting factor
Results
From the above scenario analysis it can be identified that with the increase in the
discounting factor the NPV reduces and with reduction in discounting factor the NPV increases.
However, it is further found that the IRR is indifferent with the changes in the discounting rate
and remains at 10% (Cho et al., 2014).
Recommendation
From the above it can be found that NPV for ice cream project of Zespri it can be
identified that the NPV of the project is 18.30198. IRR of the project is 9.56% which is more
than the cost of capital which is signifying that the project shall be accepted. From the given
scenario it can further be identified that the project’s payback period is 11.38 years which is less
than the useful life of 14 years. As the project is fulfilling all the acceptability criteria the
company shall proceed with the project.

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Reference
Cho, S.S., El Ghoul, S., Guedhami, O. & Suh, J., (2014). Creditor rights and capital structure:
Evidence from international data. Journal of Corporate Finance, 25, pp.40-60.
Koziol, C., 2014. A simple correction of the WACC discount rate for default risk and bankruptcy
costs. Review of quantitative finance and accounting, 42(4), pp.653-666.
Krüger, P., Landier, A. & Thesmar, D., 2015. The WACC fallacy: The real effects of using a
unique discount rate. The Journal of Finance, 70(3), pp.1253-1285.
Levy, H. (2015). Stochastic dominance: Investment decision making under uncertainty. Springer.
Yuniningsih, Y., Widodo, S., & Wajdi, M. B. N. (2017). An analysis of decision making in the
stock investment. Economic: Journal of Economic and Islamic Law, 8(2), 122-128.
Zespri.com (2019). Zespri Official Site . Retrieved 22 May 2019, from https://www.zespri.com/