Organic Farm Food Plc: Detailed Investment Appraisal Report

This report presents an investment analysis of Organic Farm Food Plc, a Buckinghamshire-based organic food manufacturer, focusing on a potential expansion project in Ireland. It examines the company's operations, revenue growth opportunities through business service expansion and product diversification, and assesses the financial viability of the Irish investment project using capital budgeting tools. Key considerations include macroeconomic and forex risks, political and sovereign risks, and the impact of changing climatic conditions. The analysis incorporates forecasted financials under optimum, normal, and worst-case scenarios, taking into account factors like revenue growth, variable and fixed costs, and taxation. Alternative financing approaches are discussed, with a recommendation for equity financing. The report also emphasizes the importance of managing foreign currency risk and hedging strategies to mitigate uncertainty in reported income. Ultimately, the report provides insights into the potential investment outcome and offers recommendations for Organic Farm Food Plc to ensure sustainable growth and financial stability. Desklib provides access to similar solved assignments and past papers for students.

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1ORGANIC FARM FOOD PLC
Executive Summary
The assignment deals with the investment analysis conducted on the Organic Farm Food Plc.
a company located in the Buckinghamshire. The operations of the company were studied in
detail and the possible revenue growth of revenue in the form of expanding business services
and product portfolio diversification are some of the key aspects. The investment project was
studied with the help of application of various capital budgeting tools which helped them
asses the financial viability of the project.

2ORGANIC FARM FOOD PLC
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................4
Business Scenario and Importance of Management..............................................................4
Forecasted Financials.............................................................................................................5
Foreign Currency Risk...........................................................................................................7
Political and Business Conditions..........................................................................................8
Alternative Financing Approach............................................................................................8
Climatic Conditions and Macroeconomic Risks....................................................................9
Investment Outcome..............................................................................................................9
Conclusion................................................................................................................................10
Reference..................................................................................................................................12

3ORGANIC FARM FOOD PLC
Introduction
Organic Farm Food Plc. located in the Buckinghamshire is a organic food
manufactures operating since the year 1980. The company primary activities involves in the
production of goods and then selling it to the ultimate consumers through various retails and
wholesale chains. The development of the market in the context of the demand of the product
and the varied interest of the consumers in the product portfolio had led to the substantial
growth of the company. Development and changes are necessary in every business which
help business look for growth opportunities in the context of expanding business services.
The business environment and the macro-economic conditions under which the company’s
business operates are crucial to be analysed in order to identify the environment under which
the company is operating (Chisholm et al. 2016). The development of the company has been
in phases and in order to optimally develop the business the company needs to undergo
technological changes which will be done through capital expenditure by the company. The
capital structure of the company is dependent on various sources of capitals like Equity,
Preference Shares and Debt. Since, the company is looking for growth in business by
investing into other locations which would require capital outflow in the forex currency
which comes along with macro-economic and forex risk. The company should look out for
optimal ways in order to hedge the same so that the risk of the company does not rises.
Political Risks, Sovereign Risk, Macro-Economic Risk and Changing Climatic conditions are
some of the important points which needs to be incorporated while assessing the financial
viability of the expansion project. Several Forecast and assumptions are applied whole
evaluating and assessing the Irish Investment Project but the same were used for the Organic
Farm Food Plc. in the form of given data and information’s where it would be operating
(Akimova, Stein and Prokhorova 2015).

4ORGANIC FARM FOOD PLC
Discussion
Business Scenario and Importance of Management.
The current business scenario of the Organic Farm Food Plc. involves producing
goods primarily related to the Organic Farm Food Industry. The Business Scenario under
which the company operates is dependent on the macroeconomic environment and business
factors. The management of the company is evaluating the Irish Investment Project in order
to expand the services of the business and look out for growth of the project. The Company
was restructured as a limited company from the year 1990 to 2000. There are different phase
of development in the business and the current cycle in which the business says that the
technological up-gradation of the business is at an optimal stage (Chandra 2017). The
company will be going for a technological up-gradation in the form of Capital Expenditure in
Machinery and Tools. The company faces a stiff competition from the other inorganic food
manufacturer which provides a tough competition in the form of substitute goods. The
Company is trying to expand the services of the business in the form of increasing the
productivity level and increasing the product portfolio. The management of the company
should definitely go ahead with the plan of having its own way of selling its product to the
consumers, which in turn will result in understanding the consumers in a better way (Zhang,
Sun and Huang 2018). The packaging and marketing of goods by the company itself will help
them create a brand and a goodwill in the market. Getting access to market and increasing
the market share in a business are some of the main factors which marks the growth of
business. Organic Farm Food Plc. has been in line with following the same procedures and
should strategies different application of the management strategies in the operation of the
business so that the company stays well stabilized. The management of the company at the
same time should maintain the financial positions of the company at a better stage and should
have a good amount of liquidity in order to have a better Financing options for the company.

5ORGANIC FARM FOOD PLC
The liquidity ratio for the company should be at a better stage and the same will benefit the
company in the way of uninterrupted services of the operations of the company (Tang et al.
2017).
Forecasted Financials
The financials of the company is dependent on the probabilistic scenario of the
various outcome possible from the Irish Investment. Forecasting the Cash outflow may be
based on a certain criteria and includes application of various business condition and macro-
economic conditions under which the company will be conducting its business (Sridharan
2015). The same application were applied whole evaluating the projected financials of the
company and the relevant business factors were applied. Political, Sovereign and other
macro-economic factors were some of the crucial factors that were included in the financials
of the company (Brigham et al. 2016). The financial of the company were forecasted in three
common stages such as optimum case, normal case and worst case scenario of the business.
Each of the stage of the business cycle were supposed to have its own set of forecaster set of
financials and the relevant cash flows (Guay, Samuels and Taylor 2016). In the case of
normal business conditions the Cash inflow from the Irish project are expected to grow by at
least 20% per year (Jones and Wren 2016). The probability of the business conditions are
necessary to be forecasted in order to incorporate the changing business conditions and the
macro economic conditions under which the company operates. The expenses for the
company such as the variable costs for the company is expected to grow by 3% p.a. and the
fixed costs of the company is expected to increase by 2% p.a. The following profitability was
determined after incorporating the growth of revenue and the expenses of the company
(Easton and Sommers 2018). Similarly, the profitability in the optimum stage were expected
to grow by 15% p.a. and the profitability is expected to fell around by 15% under the worst-
case scenario. For every business, it is the shareholders and the stakeholders of the company

6ORGANIC FARM FOOD PLC
that plays an important role in the capital investment and the development of the organisation
in terms of capital funding. Determining the required rate of return is very important for the
business, which will determine the creation or destruction of the stakeholder’s wealth.
1 2 3 4 5 6 7 8 9 10
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Esti mated Infl ows
Normal Scenario Optimum Scenario Worst Scenario
The required rate of return was determined for the company after incorporating the
required rate of return from the varied sources of capital and incorporating the same in to the
capitals structure of the company. The capital structure of the company was primarily seen
from equity financing; prefer shares and debt or long term borrowings in the capital structure
of the company. Taxation plays an important role for the business and the relevant cash flow
after incorporating the taxation rate of the Ireland was incorporated in the cash flows of the
company. The application of the double taxation was also taken into account where the
company would be paying only the remaining amount of taxation in the reporting currency of
the United Kingdom. The taxation rate was around 19% but the company will be only paying
around 7.5% in the United Kingdom. The taxation rate in the Ireland was around 12.5% and
the company would be paying the tax on the same for the cash flows earned in Ireland.

7ORGANIC FARM FOOD PLC
0 1 2 3 4 5 6 7 8 9 10
-10000000
-8000000
-6000000
-4000000
-2000000
0
2000000
4000000
6000000
Cash Flows
Foreign Currency Risk
Overseas Investment comes along with the Forex risk and the same needs to be
incorporated in the risk of the business. Forex risk is due to the fluctuating currency risk of
the overseas investment and the same can influence the reported amount in the financials of
the company (Denga and Jain 2017). The reporting currency for the Organic Farm Food Plc.
is Pound and the functional currency for the company is the Euro Dollar the change in the
value of the same in the form of appreciating currency of Euro Dollar will help the company
get more amount of Pound for single Euro Exchanged. Similarly, the depreciation of the Euro
dollar will result in a loss in the reporting currency getting a less amount of money in the
financials of the company. The forex risk of the company needs to be properly managed so
that the risk of the forex stays well within the risk tolerance level of the company. Usage and
application of certain derivatives and other hedging tools will help the company remove the
uncertainty in the reported income of the company in the financials of the company and
making the income statement more sustainable in the long term (Chugh, Sharma and Mehta
2017). The Cash flows earned by the company in Ireland were earned in the Euro Dollars and
after the application of the relevant tax rate; the cash flows of the company were then
converted into Pound. There are certain other factors, which determine the volatility of the

8ORGANIC FARM FOOD PLC
foreign currency like the macro-economic conditions, and the business factors are some of
the conditions that should be incorporated while assessing the forex risk (Chugh 2018).
Political and Business Conditions
The final cash flow outcome were assessed to be heavily dependent on the certain
outcome of the British Government on the trade agreements between the European Union
Nations and other countries. The Outcome of the negotiation between the two will influence
the operations and the workings of the company (Liu et al. 2017). The favourable decision for
the agreement, which will talk about the performance of the Organic Farm Foods, will
positively influence the profitability of the company bringing an upscale of 15% profitability.
The probability of such a positive outcome is expected to be around 30%. If the negotiations
turns out to be unfavourable for the Organic Farm Foods then the same will negatively
influence the operations of the company bring an downscale of around 15% in the cash flows
of the company and the probability for such an outcome is expected to be around 30%.
Alternative Financing Approach
The Investment in the Irish project 9.28 million Euro Dollars, which includes the
purchase cost of Land and the machinery, equipment, cost will be incorporated in the same.
The current capital structure of the company involves the application of debt financing,
equity and preference share financing (Filzen and Peterson 2015). The financing approach for
the company should be analysed on cost to benefit analysis keeping in view with the required
rate of return from such a capital structure and the relevant required rate of return from each
of the capital structure. The company should go for equity financing for funding the current
Irish Investment Project. The company currently can also go for Long Term Debt financing
in the form of borrowings, bank loans and issuance of fixed rate bond. The application of
debt financing for the company will help them get a tax benefit on the interest expense paid
by the company thereby making the effective interest rate at a lower rate.

9ORGANIC FARM FOOD PLC
Current Capital Structure Amt. Weight (%) Rate (%) Weight*Return
Equity Shares 1200 63% 7.09% 4.48%
Preference Share Capital 200 11% 6% 0.63%
Long Term Borrowings 500 26% 6% 1.58%
Net 1900 100% 6.69%
63%11%
26%
Capital Structure
Equity Shares
Preference Share Capital
Long Term Borrowings
Climatic Conditions and Macroeconomic Risks
The Climatic conditions of the Organic Farm Food Plc has been incorporated as the
climatic and weather condition will play a significant role and the company should analyse
and introspect the same (Gaudard 2015). The unfavourable weather conditions can influence
the company’s financial performance in a negative manner. Macroeconomic conditions such
as interest rate scenario, inflation rate and the other macroeconomic policy in an economy
plays an significant role in the operations of the company and the same plays an significant
role in determining the future growth of the company (Banerjee 2015).
Investment Outcome
The financial analysis of the Irish Investment Project will help the company
incorporate several factors and possibility of the various outcome in the forecasted financials

10ORGANIC FARM FOOD PLC
of the company. The total cash outflow from the project was estimated to around 9.28
million, which includes the cost of machinery and the cost of land (Cornwall, Vang and
Hartman 2016). The cash flows for the company is expected to be generated after
incorporating the growth of revenue and the expenses of the company and the depreciation
factor. The taxation rate was also considered for estimating the final cash outflows from the
project. Depreciation was added back in the final cash inflows in order to generate the net
effective cash flow from the project. The company estimated the required rate of return from
the project to around 6.69%, which includes the various sources of capital (Magni and Martin
2017). The required rate of return on equity was calculated to be around 7.09% by using the
formula:
Required Rate of Return (Re): Risk Free Rate of Return+ Beta*(Return on Market-Risk Free
Rate of Return).
The risk free rate of return was calculated by taking the 10 Year Government Bond
Return and the beta of the stock was around 1.45. The return generated from the FTSE All
Share Index was estimated to be around 5.30%. The Net Present Value generated from the
project was estimated to be around 2.38 million pound. The Internal Rate of Return generated
from the project was around 10.57% and the same was sufficient to analyse the financial
viability of the project. The net present value generated by the project was calculated by
incorporating the relevant cash flows from the project and by using the relevant Weighted
Average Cost of Capital from the Irish Investment Project.
Conclusion
The Irish project should be accepted after the analysis of the relevant cash flows and
the net present value, which will result in the wealth creation of the shareholders of the
company. The Internal rate of return generated from the project was around 10.57%, which

11ORGANIC FARM FOOD PLC
states that the same is well above the weighted average cost of capital for the company. The
payback period for the company Irish Investment Project was around 7.09 years. There were
several factors and points evaluated and incorporated while analysing the financials of the
company. The influence of the several political risk and the effect of the foreign currency
exchange risk was taken into account. The optimal capital structure for the company may be
considered after incorporating the cost to benefit analysis of each of the capital financing
methods, which the company can apply. The company should go ahead with the Irish
Investment Project, as the same will be beneficial for the company. The strategy for the
management of the company in increasing the product portfolio and expanding the business
services was also found to be good enough so that the business risk and the revenue of the
company gets diversified. The management of the company should also look out for
continuous developments, opportunities and growth factors where it can apply and utilize the
same.

12ORGANIC FARM FOOD PLC
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