Analyzing the Financial Feasibility of a Rose Cultivation Project

This report offers a detailed financial analysis of a proposed rose cultivation project, advising Angelina and Brad on their investment decision. The analysis considers various cost factors, including initial costs (land clearing, fertilization, greenhouse, and equipment), ongoing operational expenses (cultivation, pest control, marketing), and sales projections. It evaluates the project's profitability using discounted cash flow techniques, considering the after-tax cost of capital for both cut roses and potted roses. The report also examines the impact of listing the firm on the ASX, discussing changes in taxation, capital structure, and the cost of capital. Ultimately, the report recommends whether Brad and Angelina should accept or reject the project and whether listing the firm is advisable, considering their retirement plans and the complexity of corporate structure. The report includes a justification for the chosen discount rate and a discussion on the advantages and disadvantages of listing the firm.

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 10
years since the project will not be sold, owing to the fact that Brad and Angelina will stay there
after their retirement that is 10 years from today. In addition, the project development cost will
be 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 incurred
irrespective of the decision. Development and testing period will be 1 year, whereas plantation to
commercial period will be 3 years. This directly implies that the start of commercial phase will
be the fourth year, and will last till the tent year from today. Hence the effective period of sale is
exactly seven years.
Initial cost
The initial pre-tax cost will entail land clearing cost, fertilizing cost and OPEX, whereby
OpenX for further development and stock production will be $140,000, and will Last a total of
12 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 fertilizing
cost will be one thousand dollars, and it is important to note that clearing and fertilizing would
occur the day roses are taken out of planting, and that is one year from now.
Equipment cost
The existing equipment cost ninety thousand dollars, which should be ignored since it’s
already incurred. The remaining depreciation on the machine will, however, be used for tax

benefits (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 5
years are still left.
Greenhouse cost
The total greenhouse cost will be $107, 000 for which there will be no any depreciation
benefit. The cost is broken down into slab cost, material cost and labor plus insurance costs. The
slab cost will be $35,000 while the material cost will be $60,000. Labor and insurance will cost
$12,000.
Storage system and watering system
For storage of the roses, the rack equipment cost will be $7,000 and the equipment life
will be 3 years depreciated over straight line method (Nobles 2015). The watering system
equipment will cost $6,000 inclusive of installation cost. The watering system will have a life of
4 years which will also be depreciated over straight line method.
Cost during plantation phase
From the point of installation onwards, the following will be the cost; Annual cultivation
cost of $10,000 per hectare, Annual pest control cost of $5,000, fertilizer cost of $500 per
annum, annual cost of cutting and picking will be $3,000, annual marketing cost of $20,000
during the first three years of sales, annual marketing cost of $4,500 during the fourth year of
sales, marketing consultant cost of $5,000, and box delivery charges of $25 per box. It is
momentous to note that the annual labor cost and the annual marketing costs would be incurred
once the roses are cut and packed into boxes from year 4 onwards, while the marketing

consultant cost will be the agency cost for the new project, which inn absence of information, has
been assumed from year 4 onwards.
1 2 3 4 5 6 7 8 9 10 11 12
$-
$(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)
EBITDA
Commercial
Sales information
The existing sales have recorded an annual loss of $30,000. However it is projected that
over the 10 years, both the number of boxes sold and the price per box will be increasing to a
peak value of 1,500 boxes in the fourth year and then deteriorate gradually, forming a normal
curve. For potted roses, an estimate of 1,000 potted roses would be sold at the end of the 10th
year from today, with the price per potted rose being $50. Each pot will cost $10 while the
delivery 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 will
be the same as it would incur for cut-flower market.

1 2 3 4 5 6 7
$70,000.00
$127,500.00
$270,000.00
$382,500.00 $390,000.00
$330,000.00
$270,000.00
Net Revenue
Commercial
3. Justify your choice of discount rate for the analysis
The after-tax cost of capital for rose cultivation will be at the rate of 10.75% and the risk-
adjustment discount would be used for projects that do not involve growing roses. But since this
process involves growing, risk-adjusted cost was ignored (Jones 2015). The after-tax cost of
capital for potted rose would be at the rate of 17.75% which is the risk-adjusted discount since
the project does not involve growing of roses.
1 2 3 4 5 6 7 8 9 10 11 12
$-
$(81,200.00)
$(17,013.33)$(16,433.33)$(16,433.33)
$2,030.00
$33,350.00
$113,970.00
$183,860.00$189,660.00
$157,760.00
$125,860.00
NOPAT
Commercial

4. Currently, Rosanna Roses is structured as a partnership. Brad and Angelina
BFA728 assignment RWC2017 8 are thinking about listing the firm on the ASX if this
project is successful. They have asked you to explain the impact (if any) that listing would
have on the capital budgeting process. Write a short essay to advise them on this matter
Many are the times we’ve heard of the term listing, and without an iota of doubt, we
often assume we know exactly what it means. Well, the term itself has several meanings and
different application. In business, a listed company or property is a company whose shares are
traded openly on an official stock exchange, which in turn requires that the company adheres to
the set minimum listing requirements, for instance, number of shares and minimum earnings
level (Elliot 2017). Quoting a company’s shares for public trading in the stock exchange
therefore has far- reaching impacts on the company, and therefore listing of Rosanna Roses
would impact as follows;
The partnership would be converted into a corporate structure, in which additional
departments will be put in place, as well as various managerial positions created. For instance the
position of chief executive officer, chairperson and even board of directors. Taxation rate would
lower down to corporate tax rate of 30% instead of marginal rate at 42% (Damodaran, 2016).
In addition, Angelina and Brad would not be enjoying the benefit of partnership wherein
the firm would not be taxed and they would be paying tax only on the distributed profits after
bearing all the costs of the firm at marginal tax rate. For a company the tax would be paid on the
corporate and dividends distributed to shareholders including Brad, Angelina and others will also
be taxed in the hands of the company.

Dividends would, however, be tax-free in the hands of shareholders, and Angelina and
Brad will have to share profits with other shareholders in the form of dividends. Apart from
sharing of profits, there will be continuous pressure on profitability and business performance of
Angelina and Brad as the manager of business which may impact on the capital budgeting
decision.
There will always be choice between distribution of surplus cash flow generated in the
business as either dividends or investment into business for growth.
Another momentous impact is that the cost of capital for a listed company is lower than a
partnership firm due to the better transparency and liquidity of listed company. Access to funds
needed for capital budgeting will become more easy and competitive and hence will have a
myriad of positive impact on the cost of capital (Fracassi, 2016).
Therefore, with all the impacts of listing in mind, and given Brad and Angelina have only
one business of rose cultivation and with their plan to retire 10 years from now, and considering
the complexity in running a corporate structure which is run on a going concern basis, it is
advisable not to go for listing and just continue the same partnership structure.

Bibliography
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Weygandt, J., Kimmel, P. and Kieso, D. (n.d.). Financial & managerial accounting.