BioCottonGroup
AsthenewlyappointedChiefFinancialOfficeroftheBioCottonGroup(BCG),youare abouttoanalyseaproposalforthemarketinganddistributionofgeneticallyengineered cottonseeds,whichhavebeendevelopedbyabiotechnologyfirm.Thisfirmwillsupply seeds and permit BCG to market and distributethem underalicence.
Marketresearch,costing£150,000,hasalreadybeencarriedoutbyBCGtoestablishthe likelydemandforgeneticallyengineeredcottonseeds.Afterfiveyears,BCGwillstop selling theseseedsasthecompanyanticipatesthatthisproductwillbesupersededby newer biotechnological developments.
Theannualpaymenttothebiotechnology firmwillbe£800,000forthelicence;thiswillbe payableattheendofeachaccountingyear.£400,000willbeinitiallyneededtobuy afleetof vehicles fordistribution. Thesevehicles willbesold at the end ofthe fifthyear for £150,000.
Theproject will requirepackaging andadministrative facilities. BCGis alargefirm andhasa suitable factorywith offices, currentlylyingunused. TheHead Officehasstated that theywill letthisspace toyour projectata reducedrentof£300,000per annumpayable atthe endof eachaccountingyear. However, theopen market rental value is £500,000 per annum.
Theprojectwouldstartin2013andwouldnotbesubjecttoanytaxationbecauseofits specialstatusasagrowthindustry.Arelativelyjuniorandinexperiencedaccountanthas
prepared forecast of profit and loss accounts fortheproject as shown in the followingexhibit.
Exhibit |
| ||||
Year | 2013 | 2014 | 2015 | 2016 | 2017 |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Sales | 5640 | 5980 | 6000 | 6200 | 6200 |
Costs
Market research |
150 |
|
|
|
|
Raw material (seeds) |
1900 |
2200 |
2200 |
2200 |
2200 |
Licence |
800 |
800 |
800 |
800 |
800 |
Vehicle fleet depreciation |
80 |
80 |
80 |
80 |
80 |
Direct wages |
470 |
470 |
470 |
470 |
470 |
Rent |
300 |
300 |
300 |
300 |
300 |
Overheads |
480 |
480 |
480 |
480 |
480 |
Variable transport costs |
455 |
455 |
455 |
455 |
455 |
Profit | 1005 | 1195 | 1215 | 1415 | 1415 |
Byexpandingitsproductsrangewiththesenewcottonseeds,thefirmexpectstoattracta greatdealofpublicitywhichwillimprovethemarketposition,andthustheprofitabilityofits otherproducts. The benefit is estimated to be£87,000 for each of thefiveyears.
Headofficenormallyallocatesaproportionofitscoststoanynewprojectasapartofits budgeting/costing process.Thiswillbe£92,000perannumforthisprojectand hasbeen includedinthe‘overheads’calculatedby theaccountant.Theremainderofthe‘overheads’is directlyrelated to theproject.
Thedirectwages,seedpurchases,overheadsandvariabletransportcostscanbeassumedto be paidattheendofeachyear.Sales revenues are alsoassumedtohave been received atthe endof eachyear. The projectrequiresa workingcapitalof £1millionwhichneedstobe in place atthe startof the project.Thisamountwillbe recoveredatthe endof the project. Assumethatthere isnoinflation.Giventheriskinessoftheproject,adiscountrateof9%is appropriate.
Required
Preparethecase,withrecommendations,tobepresentedtotheBoardofDirectorsof BCG.Youshouldassesstheviabilityoftheproposedprojectusing theNPV,IRRand payback methods.
12 years ago
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2014-02-25_123835_bio_seeds_npv1.docx- 2014-02-25_123913_bio_seeds_npv.xls
