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AEB 4138 – Advanced Agribusiness Management Fall 2019
Case Study Assignment 2: Capital Budgeting
For this individual critical thinking assignment, you will take on the role of Sadie (or Saul) McDollar who has been hired by Kropp’s Crops to assist with the evaluation of three mutually exclusive investment options. Kropp’s Crops is currently growing citrus but is feeling the squeeze (pun intended!) due to citrus greening (Huanglongbing or HLB). Thus, Kropp’s Crops is considering replacing its grove with hemp, hops, or blueberries. All three commodities have experienced recent increases in demand and Kropp’s Crops wants to choose the soundest investment option. Your job is to evaluate these three options using the capital budgeting techniques discussed in class and make a recommendation to the owners of Kropp’s Crops regarding which investment option should be pursued. To complete the analysis, use the information below and the three sets of free cash flow projections (hemp, hops, and blueberries) provided in the excel file (note: these cash flows do not take into account the initial cost of the investment or the sale of farm in October of 2033; however, your analysis should). All cash flow projections are per acre. Your write-up should clearly state your recommendation regarding which commodity Kropp’s Crops should invest in. You must justify your decision using capital budgeting techniques (payback, discounted payback, NPV, IRR, and MIRR). Please make sure you highlight the benefits and drawbacks of each of the capital budgeting techniques in your write-up and how you used the techniques to arrive at your decision.
Crop information used to construct the cash flows: Hemp is an annual crop, which means that it must be planted every year. As a result, the returns profile of hemp is relatively stable; year-to-year changes in predicted profits are mostly due to anticipated changes in costs of production and supply and demand factors affecting price. Hops have a 5-year lifecycle and hence there are additional cost incurred every 5 years due to replanting. As a result, the returns profile of hops is cyclical. Blueberry bushes take a few years to mature before they produce berries. Once the bushes start producing berries, returns are relatively stable. Kropp’s Crops plans to plant all available acres to either hemp, hops, or blueberries. Thus, the investments are mutually exclusive. Each crop will require an investment of $5000/acre to convert the grove and plant the initial crop in October of 2019 (time 0). The owners of Kropp’s Crops plan to sell the farm in 2033 and retire to the Bahamas. It is expected that farm will sell for $11,111, $12,222, or $16,667 if it is converted to a hemp, hops, or blueberry farm, respectively, in 2033.
AEB 4138 – Advanced Agribusiness Management Fall 2019
Please use Kropp’s Crops weighted average cost of capital (WACC) of 18% as the discount rate in your analyses. Kropp’s Crops benchmark payback period is 5 years; it uses this criterion for both payback and discounted payback analyses. Kropp’s Crops hired a consulting firm to construct the project cash flows and to calculate the WACC. Thus, the projects are sound. The owners of Kropp’s Crops are looking for advanced analysis with evidence of critical thinking. The owners always appreciate well-written write-ups that make appropriate use of correct grammar and spelling. They are also very busy therefore write-ups written in a concise manner are better received. However, if you have just one page of writing, it will not be graded and you will earn a zero. The course website will only allow you to submit one document in Microsoft word format. Thus, you will need to embed your excel tables and graphs in your word document before uploading your write-up to the course website. I must receive both a hardcopy and electronic version submitted through the course website by 1:55pm on the due date. Otherwise, the write-up is considered late and will not be graded. Please note that this is an individual assignment. Plagiarism – intentional or unintentional – will not be tolerated. To avoid plagiarism, never type your assignment while you are having a conversation with a peer regarding the case study. Never share a digital draft or excel file of your work via email. Suspected plagiarism (including but not limited to similar structure of ideas, same calculations, similar assumptions, similarly formatted tables, etc.) will be dealt with swiftly and severely to the extent possible allowed by the Student Honor Code. Plagiarized assignments will earn a grade of zero. Extra Credit Opportunity: I will award an additional 5 points (essentially half a letter grade) to any write-up that properly references at least two relevant articles from Harvard Business Review, Economist, Bloomberg, NY Times, Wall Street Journal, or equivalently reputable popular press sources. The Harvard Business Review (HBR) is a magazine typically written by academics (i.e., professors and other researchers) for practitioners (i.e., managers). The HBR, therefore, is written in a manner that is very accessible and relatively enjoyable to read. Many senior-level managers read the HBR to learn about the most cutting-edge management, marketing, human resource, and finance research. The HBR is easily accessed via the UF Libraries website. Note, to receive extra credit you must show evidence that you have read and understood the articles and use the articles to support your analysis and assumptions. If you simply quote directly from the article, you will not receive extra credit. Stock price quotes do not count toward the extra credit.
AEB 4138 – Advanced Agribusiness Management Fall 2019
Sources should be cited within the text of your write up using the author(s)’s last name(s) or source and the year of publication. For example, Kropp (2019) stated all statistics and other items that are not common knowledge must be cited properly. References cited with the text (and only those cited in the text) need to be listed in alphabetical order by lead author’s last name in a reference list. Please refer to this guide when preparing your reference list: http://www.oxfordjournals.org/our_journals/ajae/for_authors/guide.pdf
AEB 4138 – Advanced Agribusiness Management Fall 2019
Topics
--------------------------Achievement Level--------------------------
Weight You’re Fired
(Level 1) Unsatisfactory
(Level 2) Satisfactory
(Level 3) Good
(Level 4) Excellent (Level 5)
Explicitly Stated Investment
Recommendation
No recommendation given
Vague recommendation given at the end of the write-up
Clear recommendation at the end of the write-up
Clear recommendation given in the first paragraph of the write-up
Clear recommendation given in the first sentence of the write-up
5%
Payback Period No analysis using payback period
Incorrect payback period analysis or the payback period is correctly calculated for only one investment option
The payback period is correctly calculated for all investment options
Level 3 plus a discussion of how the payback period was used to make the investment decision
Level 4 plus a discussion of the benefits and drawbacks of the payback period method
12.5%
Discounted Payback Period
No analysis using discounted payback period
Incorrect discounted payback period analysis or the discounted payback period is correctly calculated for only one investment option
The discounted payback period is correctly calculated for all investment options
Level 3 plus a discussion of how the discounted payback period was used to make the investment decision
Level 4 plus a discussion of the benefits and drawbacks of the discounted payback period method
12.5%
NPV No analysis using NPV
Incorrect NPV analysis or NPV is correctly calculated for one only investment option
NPV is correctly calculated for all investment options
Level 3 plus a discussion of how NPV was used to make the investment decision
Level 4 plus a discussion of the benefits and drawbacks of the NPV method
12.5%
IRR No analysis using IRR
Incorrect IRR analysis or IRR is correctly calculated for only one investment option
IRR is correctly calculated for all investment options
Level 3 plus a discussion of how IRR was used to make the investment decision
Level 4 plus a discussion of the benefits and drawbacks of the IRR method
12.5%
MIRR No analysis using MIRR
Incorrect MIRR analysis or IRR is correctly calculated for only one investment option
MIRR is correctly calculated all investment options
Level 3 plus a discussion of how MIRR was used to make the investment decision
Level 4 plus a discussion of the benefits and drawbacks of the MIRR method
12.5%
Recommendation Justified
No discussion comparing each of the capital budgeting procedures
Vague discussion comparing each of the capital budgeting procedures
Clear discussion comparing each of the capital budgeting procedures
Level 3 plus a discussion clear of the preferred capital budgeting procedures and why they are preferred
Level 4 and the discussion is linked to the investment decision recommendation
12.5%
Grammar Several spell check errors
No spell check errors, but spelling errors exist
Level 2 and no spelling errors Level 3 and no grammatical errors Level 4 and pronoun use is correct
10%
Readability Write-up is one giant run on sentence
Write-up uses paragraphs, but paragraphs often contain several thoughts
Write-up uses well-structured paragraphs and simple sentences
Level 3 and write-up uses headings to guide the reader, graphs and tables to illustrate key points, and is appropriate for finance experts
Level 4 and graphs and tables are well labeled
10%