Financial Analysis and Investment for Organic Farm Food Plc (2018-19)

This report provides a comprehensive financial analysis of Organic Farm Food Plc, a wholesome organic food manufacturer. The analysis includes an executive summary, discussion of managing the company's growth, and an examination of foreign exchange risks associated with its expansion into the Republic of Ireland. The report forecasts revenue and expenses, considering normal, optimum, and worst-case scenarios, and calculates the company's profitability, taking into account taxation and currency exchange rates. The investment analysis focuses on a potential farmland purchase and assesses the net present value and internal rate of return, using the Capital Asset Pricing Model (CAPM) to determine the required rate of return. The report also provides a detailed breakdown of the company's estimated inflows and outflows, along with a sensitivity analysis of probable profits and losses, offering a detailed financial assessment for Organic Farm Food Plc.

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Running head: FINANCE FOR INTERNATIONAL
Organic Farm Food Plc.
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary
The aim for the assignment is to conduct a financial assessment and analysis of the
Organic Farm Food Plc. The investment analysis for the company was done in order to
evaluate the growth of the company in respect of the various factors under which the
company operates. The expansion for the Organic Farm Food Plc. was reviewed in the
context of product portfolio diversification and technological up-gradation. The feasibility
of the investment done by the company includes reviewing the investment done by the
company and the expected cash outflows from the project.

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Table of Contents
Introduction........................................................................................................................3
Discussion..........................................................................................................................4
Managing the Organic Farm Food Plc...........................................................................4
Synthesis........................................................................................................................5
Foreign Exchange Risks................................................................................................5
Analysis..........................................................................................................................6
Conclusion.......................................................................................................................12
Reference........................................................................................................................13

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Introduction
The Organic Farm Food Plc. founded in the year 1980 has been operating as a
Wholesome Organic Food manufacturer located in Buckinghamshire. The company
started as a small private limited company owned by the group family members and
slowly expanded the line of business operations as the market conditions and the
business grew. The company got restructured as a public limited company in the year
1990. The business from the year 2000 has been experiencing growth in the operations
of the business and the same was seen when the business condition grew for the
company (Torsney-Weir 2018). The expansion of the business as projected by the
company requires the incorporation of technological up-gradation and updating the
equipment’s of the company. The large-scale expansions as thought by the
management of the company will depend on the various options presented by the
company in the form of capital investments (Cucchiella, D’Adamo and Gastaldi 2015).
The growth stage of the company is set at the different level where in the year 2000
technological up-gradation of the assets of the company will be helping the company in
the optimum utilization of resources (Gaudard 2015). The company is looking for the
product portfolio diversification and the same needs to be incorporated in the company
along with current business structure. The feasibility analysis for the project would be
done by taking into account various business strategies and functions. The company
also thought for packaging and promoting the product by itself so that it can reach out
the market and customers directly and create a brand value and goodwill in the market
(Yates and Marra 2017). The investment analysis for the project would be considered
by purchasing a good farmland in the Republic of Ireland, which will increase the

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productive capacity of the company and at the same time will increase the sales of the
company. The relevant treatment of the expenses of the company under various
situations are forecasted for the company (Howard et al. 2016).
Discussion
Managing the Organic Farm Food Plc.
The Organic Farm Food Plc. is currently in the growth stage of the production
where the business operations of the company is at an optimal level and the operations
of the company could only expand when the company goes for capital expenditure
(Chisholm et al. 2016). It is important for the company currently to understand the
aspects of the growth and opportunities it has and under the business condition under
which the company operates. The business operation for the company will be
significantly dependently on the numerous macro-economic conditions and climatic
conditions, which will directly influence the revenue of the company. The company
should be analyzing various present business growth opportunities available with the
expected costs and investments and to be done and the significant benefits flowing form
the same. The business environment in which the company operates is quite
competitive as there is a direct competition faced by the company with the inorganic
farm products available within the market. The firm is evaluating the investment
opportunity in the Republic of Ireland where the company will be buying 1000 acres of
land at € 8,088 per acre of land. The sales and the key expenses for the company were
forecasted at the given time period where the sales of the company were expected to
increase by about 20% per annum. The labor costs and other variable cost of the

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company is expected to increase by around 3% p.a. The fixed costs for the company is
expected to increase by around 2% p.a.
Synthesis
The business operation for the Organic Farm Food Plc. has been growing and
the current capacity of the equipment is at the optimal level where further production of
goods is not accessible by the company (DeFusco et al. 2015)). The company is
reviewing the alternative sources of capital expenditures in order to bring about the
growth in the company and the same could be done by updating the plant and
machinery and the equipment’s it could. Further, the company is also reviewing
investment into farmland for increasing the production of the company but the same will
be done at the Republic of Ireland where the company may face several macro-
economic factor risks related to the same. The company would also need to account the
cost to benefit analysis on the same by deciding upon the ini6tial investment and the
cash outflows expected from the project. The growth and sustainability of the profitability
of the company is the major part, which the company needs to focus, and the same
could be done by investing into positive Net Present Value Projects. The analytical
tools, which could help the company in determining the success and the profitability of
the project by the application of the Investment Assessment tools (Chandra 2017).
Foreign Exchange Risks
The company will be exposed with the foreign exchange currency risks as the
primary production and sales of the company will done in the Republic of Ireland where
the functional currency will be Euro Dollars and the reporting currency for the company
will be British Pound (Lustig, Roussanov and Verdelhan 2014). The currency risk

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associated with the Euro dollars is because of the functional currency of the company
being euro dollar, the reporting currency of the company is the British pound, and the
conversion of the same can result in foreign exchange gain/loss (Beckmann and Stix
2015). The foreign exchange risk applicable with the company is due to the volatile
currency movement. The reported profit in the Euro dollar will be converted into the
British pound where the reported profit/loss will fluctuate depending on the foreign
currency rate. The company should enter into derivatives contract in order to hedge the
foreign currency risk (Schreger and Du 2014).
Analysis
The profitability of the company were forecasted by using the estimated revenue
for the company and the expenses for the company. The estimated revenue for the
company was forecasted to grow at a 20% p.a. The variable expenses for the company
were grown by about 3%p.a and the relevant fixed costs for the company was expected
to grow at 2%p.a (Boyd, Epanchin-Niell and Siikamäki 2015). The net profitability of the
company after incorporating all the expenses and the revenue estimates for the
company from the period 2019 to 2029. The company operates in a cyclical business
factor scenario where the probability of risks amongst the revenue estimate for the
company may change significantly (Judge 2015). The revenue for the company were
determined at the different probable outcome as in the normal case, optimum case and
the worst case where the profitability for the company at each period was determined
(Vogel 2014). The probability of the normal case where the forecast of the company is
expected to remain the same as per the forecasted level was around 40% and the
expected level of income at the same time was determined (Chisholm et al. 2016). The

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probability under the optimum case was determined where the political condition would
be favorable for the business and the expected increase in the profit would be around
15%. The probability under the worst case was around 30% and the expected decrease
in the profitability was around 15%. Each of the probable situations were taken into
account and the relevant profit/loss arising from the country was evaluated. The
profitability determined in the Euro currency was then transformed into the British Pound
Currency. The effect of taxation was taken into consideration for the project and the
relevant net profit after tax for the company was determined for the company
(Dewachter et al. 2015). The taxation rate and level given for the income earned in
Ireland was taxed at 12.5% and the relevant tax rate in the UK was around 19%. The
effective level of tax rate in the UK was around 7.5% as the company paid around
12.5% of tax rate in the Ireland and in order to avoid the double taxation affect the same
was taken into consideration (Boyd, Epanchin-Niell and Siikamäki 2015).
The current currency exchange rate was taken into consideration for the
transferring the functional currency into the reporting currency and the relevant
adjustments were recorded for the company. The reformatted profitability and the
financials for the company was prepared in both the cases in accordance with the Euro
Currency and the British pound. The Net investment done by the company was
calculated on the base of the total acres of land purchased by the company and the per
acre costs for the land incurred by the company. The initial investment also included the
investment done for the purchase of the machinery done by the company (Krupa 2016).

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2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Esti mated Infl ows
Normal Case Optimum Case Worst Case
Estimated Probable Profit/Loss (Amount in €)
Particulars 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Normal Case
128,80
0 200,460 287,445 392,848 520,381 674,500 860,552
1,084,95
6
1,355,41
3
1,681,16
8
Optimum
Case
148,12
0 230,529 330,562 451,775 598,438 775,675 989,635
1,247,69
9
1,558,72
5
1,933,34
3
Worst Case 82110
127793.
3
183246.
2
250440.
5
331742.
9
429993.
7
548602.
1
691659.
4
864075.
9 1071745
Total
Probable
Profits
359,03
0 558,782 801,253
1,095,06
4
1,450,56
2
1,880,16
9
2,398,79
0
3,024,31
5
3,778,21
4
4,686,25
6
Taxation @
12.5% 44879 69848 100157 136883 181320 235021 299849 378039 472277 585782
Profit After
Tax
314,15
1 488,934 701,096 958,181
1,269,24
2
1,645,14
8
2,098,94
1
2,646,27
5
3,305,93
7
4,100,47
4
Estimated Probable Profit/Loss (Amount in £)
Particulars 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Reported
Profit in €
314,15
1 488,934 701,096 958,181
1,269,24
2
1,645,14
8
2,098,94
1
2,646,27
5
3,305,93
7
4,100,47
4
Currency 25962 404078 579418 791885 1048960 1359626 1734662 2187004 2732180 3388821

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Rate (£1 = €
1.21) 9
Taxation @
7.5% 19472 30306 43456 59391 78672 101972 130100 164025 204913 254162
Profit After
Tax
24015
7 373772 535962 732493 970288 1257654 1604562 2022979 2527266 3134660
Taxation in the U.K will be charged at 7.5% as the taxation rate in UK was around 19% and Taxation in Ireland was around
12.5%

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Net Investment for the Company was calculated to be around 9,298,000 million and the same will be used
by the company for determining the total net present value of the investment. The expected cash flows
from the project was determined using the probability assumptions applied by the company. The various
outcomes of the political decision was taken into account for determining the change in the level of
profitability of the business with the expected outcomes from the project. The required rate of return was
calculated by using the Capital Asset Pricing Model Equation (CAPM). The required rate of return for the
project was determined to be around 7.09%.
Particulars County Kildare
Total Acres of Land for Purchase 1000
Per Acre Costs 8088
Total Investments 8088000
Additional Investments 1210000
Net Investments 9298000
Beta 1.45
Return on 10 Y. Government Bond 1.32%
Return on FTSE All Share Index 5.30%
Required Rate of Return 7.09%
Net Present
Value
Year
2019
Year
2020
Year
2021
Year
2022 Year 2023 Year 2024 Year 2025 Year 2026 Year 2027 Year 2028 Year 2029
(Cash
Outflow)/Cash
Inflow -9298000 435,151 609,934 822,096 1,079,181 1,390,242 1,766,148 2,219,941 2,767,275 3,426,937 4,221,474
Net Present
Value 2381922
Internal Rate of
Return 10.57%

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The financial analysis of the project showed that the investment is viable as the cash flows from the
project is seen to be growing at the internal rate of return from the project was around 10.54%. Which
shows

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that the same was much larger than the required rate of return from the project. The
average return provided by the shares of the company was around 5% p.a. The
company should forecast the macro economic conditions and the business factors
under which the company business will be operating. The influence of such factors
will directly influence the source of funding structures for the company. The company
has various options for financing the current expansion structure was evaluated with
the best financing option available for the company.
The weighted average cost of capital for the company was derived by taking
into account about the various long-term capital structure available for the company
and the weightage of the same in the capital structure of the company. The company
had primarily three major sources of financing for the capital structure of the
company and the same was in the form of preference shares, equity shares and in
the form of debenture or the long-term sources of borrowing for the company. The
weights of each of the capital structure for the company was taken into consideration
and the relevant interest rate applicable for each of the capital structure was taken
into consideration while determining the capital structure of the company. The
weights of equity for the capital structure of the company in the capital structure of
the company was around 63% and the weights of the preference share was around
11% in the capital structure of the company and the weights of the debt in the capital
structure of the company was around 26%. The net effective weighted average cost
of capital for the company was around 6.69% and the same was used for
determining the net present value of the company investment to be done in the
country of Ireland.

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Weighted Average Capital Structure Amount Percentage (%) Rate (%) Weight*Return
Equity 1200 63% 7.09% 4.48%
Preference Share 200 11% 6% 0.63%
Debt/ Borrowings 500 26% 6% 1.58%
Total Capital 1900 100% 6.69%
Conclusion
The Irish Investment to be done by the Organic Farm Food Plc was evaluated on the
basis of the investment done by purchasing the land purchased in the Republic of
Ireland and the relevant factor was taken into consideration. The project is
considered to be financially viable as the project will be giving out positive net cash
outflows form the project on the base of the initial investments done. The application
of the Internal Rate of Return for the company for the investment project was around
10.57%, which was much higher than the capital structure of the company that was
around 6.69%. The depreciation calculated was taken into consideration as a tax
deductible expenses and the same was taken into the after cash flow of the
company’s investment to be done. The Organic Farm Food Plc should analyze
various macro-economic conditions and business factors under which the company
operates and the same be in well accordance with the business operations and
functions in which the company operates.

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