Investment Appraisal & Sources of Finance Kerry Foods has, as one of its strategies, an objective to make itself a European manufacturer of baby powder foods for families throughout the world which would capitalize on its ability to be a gateway to continents such as Europe and North America as well as emerging markets such as Asia. Due to its excellent production facility based in Charleville, County Cork, Kerry Foods have the unique capacity to exploit the current opportunities this affords them.
To help its marketing team to successfully market this concept throughout the world and to cater to this valuable area, Kerry Foods’ management is considering building a new production facility. Kerry Foods’ management has asked its financial manager to consider in January 2020 whether they should proceed or not with this facility at the current time. The financial manager has presented to you, his financial assistance, with the following information and wishes that a project appraisal be performed so as to help the decision as regards proceeding or not with the building of the facility.
1. A specialized food architect company that specializes in designing these types of facilities have been hired to design the building. Kerry Foods has already incurred €290,000 to date on preliminary fees with the architect company to be paid a further €620,000 payable in three tranches, 20% now, 40% in one year’s time and the balance in two years.
2. Planning permission will have to be given to Kerry Foods by Cork County Council. Kerry Foods has estimated that this planning permission process will cost them €125,000 in year 1. An environmental impact study will have to be conducted and paid at the same time as part of the planning permission application which will amount to €114,500.
3. The production facility build will consist of five main aspects;
a. 1,150 tonnes of steel. Steel currently can be purchased at €900 per tonne. Steel prices are expected to increase by 5% every six months starting on 1 January 2020. Kerry Foods expects to commence construction on 1 January 2021. They estimate that 70% (40% in 1st Half, 30% in 2nd Half) of the steel will be used by 31 December 2021, with the balance required in quarter one of 2022.
b. Bespoke insulated wall and roof panels. The wall panels come in 3-meter lengths x 2 meters width. The proposed production facility will be 10 meters high. The two long walls will each be 290 meters long whereas both ends will be 180 meters respectively. Both ends will only require panels to cover 40% of the length due to specialized doors needed for access. The price quoted to Kerry Foods is €675 per panel. The company quoted will provide a 5% discount on quoted prices but they have recommended that Kerry Foods order 2% more panels than is required to cover any unforeseen circumstances. The roof panels will cost €300 per panel and these come in the same dimensions as the wall panels. 20% of wall panels will be used and paid for in 2021 with the balance being paid the following year. 10% of the roof will be completed in 2021 with the balance completed in 2022. The roof will be paid for in 2022.
c. Specialized access doors costing US$315,000 each. The exchange rate when the doors will be purchased and paid for in 2022 is projected at €1:$1.35
d. Lighting. The lighting will consist of 4,000 lights. 40% of these will cost €300 each with the remainder costing 30% more. These will be installed and paid in year two of the project. An electrical contractor has successfully tendered a price to install the lights based on 15 electricians working 9 hours a day for 70 days. The average cost per hour of 60% of the electricians will be €34 an hour. The balance of the workforce costs €52 an hour. e. Specialized equipment to cater to baby food quality testing and analysis will cost €1.65 million. 10% deposit is required in 2022 with 40% paid in the first half of the following year and the balance payable in the second six months of that year.
4. Staff will be hired to work in the new building. 60 staff will be required in total starting in 2021. 20 of these will transfer from existing buildings in Kerry Foods. These workers cost on average €39,750 a year. Kerry Foods makes a pension contribution for these workers at a rate of 5% of their wages. 90% of the remaining workers will be employed at an hourly rate of €17.50 an hour for a thirty-nine-hour working week. Each of these new workers will work overtime of 10% of their wages and will earn an overtime premium of 20% on their normal hourly rate. The remaining workers will be supervisors who will earn a salary of €1,750 a week. This salary will increase by 4% each year.
5. Road infrastructure around the new production facility will cost €528,000 payable equally in year 1 and year 2 from the commencement of the build.
6. Ireland’s specialized baby food powder market on 1 January 2021 is estimated at 195,000 crates. Kerry Foods’ market share at that time is expected to be 25%. Crates are projected to increase by 10% for each of the next four years moderating to an increase of 5% from then on. The new production facility will allow Kerry Foods to increase its market share to 40% of the overall baby food powder market. This increase will be in equal increases over the first three years of trading in the new production facility. Kerry Foods expects to commence operating from the new facility on 1 January 2023. Kerry Foods is unsure as regards the exact price per crate to charge customers. Market research has indicated that 50% of customers will pay €225 per crate, 30% will pay €255 per crate with the remainder willing to pay €285 a crate.
7. Marketing and advertising spend will be 5% of the additional incremental sales revenue generated.
8. The project is to be examined over a seven-year period to 31 December 2026.
9. The normal return expected by Kerry Foods when assessing similar types of projects is 8%.
- Types of Investment Appraisal methods including the advantages and disadvantages of each method and a simple worked example of each method. The methods critiqued should include but are not constrained to the following
- Accounting Rate of Return
- Discounted Payback
- Net Present Value
- Internal Rate of Return
Evaluation, using the scenario given, of the following Using the Net Present Value Method, a recommendation as regards whether Kerry Foods should proceed with building the production facility Computation of the payback period for Kerry Foods if the production facility was built
- Critique sources of finance highlighting the source or sources of finance most appropriate for a company like Kerry Foods
- Revisiting and fine-tuning the requirements covered in Part 1 – 3, prepare a final report on the whole of the assignment (combine all of the previous elements of the report together and include an introduction and conclusion).
Assessment of Process: The full final report will be graded according to the following criteria, where they apply:
- Are topics structured and organized well?
- Does the layout of information contain sub-sections required to organize the material?
- Grammar, readability, and integration
- Does writing display competence in the mechanics of essay writing and expression?
- Are spelling and grammar perfect?
- Does writing have coherence? (i.e. successive sentences should relate to each other, as should successive sections.)
- Does writing have unity? (i.e. everything should be clearly related.)
- Is the layout structured in an appropriate academic style?
- Are sources of material clearly cited and referenced?
- Is any material contained in tables or graphs clearly and adequately presented, are sources provided?
- Secondary Literature
- Is there evidence of the use of a wide range of literature and theories?
- Are reliable sources of literature used?
- Is it clear that the group has a good understanding of the literature?
- Our findings supported by secondary literature?
- Are all discussions relevant to the problem?
- Do reports develop a clear sense of core arguments, establish their relationship to the problem being posed, and sustain a focused development of the argument throughout?
- Do reports pursue analysis and synthesis in addition to a description and the production of a line of reasoning going beyond mere reading and a descriptive account of data?
- Do reports clearly identify a formulated position on the topic? Do they deal with arguments “against” as well as “for” formulated positions and arrive at some sort of conclusion?
Having completed this assignment learner will be able to:
- Identify and explain the workings of the most commonly used capital investment appraisal techniques and the sources of finance applicable to a company.
- Distinguish between techniques that use discounted and non-discounted cash flows.
- Critique the different techniques of project appraisal and the sources of finance and identify the reasoning for the use or non-use of the techniques and sources in the context provided.
- Demonstrate the techniques using spreadsheet technology.
- Application of these techniques and sources to a scenario.
- Work effectively independently.
- Adapt detailed knowledge of business disciplines to particular industry settings.
- Produce well-written reports to communicate their findings.