FROZEN FOOD PRODUCTS Case Solution
Furthermore, the cost of equity for Frozen food project is calculated using beta equity of Venky’s India Ltd Company, which is used to calculate business risk of the new line of Product, then that beta asset was re-geared with predetermined financial gearing of the project, which is 1:3. The cost of equity is calculated as 12.27%. The ungeared cost of equity, geared cost equity and weighted average cost of capital can be seen in Exhibit- 3
Finally, the weighted average cost of capital was estimated as 10.6%; using the geared cost of equity and the cost of debt of 8%.
TERMINAL VALUE OF THE PROJECT AFTER FIVE YEARS
The terminal value of the project is calculated as $18.3 million by using perpetuity growth rate of 5%. In order to get more accurate forecast, some sensitivity analysis would be really helpful to determine any key factors that can affect the cash inflows of the project and their values. The estimation of the terminal value can be seen in Exhibit 1.
NPV AND MIRR OF THE FROZEN FOOD PROJECT
The NPV of the project was calculated as $5.5 million and the MIRR was estimated at 6% refer exhibit 1. The cost of capital should be lower than IRR and MIRR, the current cost of capital is high as compared to 6% MIRR, which also suggests that the cost of capital should be recalculated after incorporating other key variables and using other similar companies for business risk computations
RECOMMENDATION TO MARIA D’SOUZA
The project is generating a value for Maria D’Souza, which is evident from the FCFF valuation. The project looks favorable from NPV point of view, but further sensitivity analysis of the project will give a clearer picture of the project and help Maria to take decisions. The reliable and accurate cost of capital will play an important role in the discounting of cash flows for cost of capital. Furthermore, some other companies should also be considered with more or less same net income, debt to equity ratio, and total assets. Currently, the NPV is positive; this suggests that the project should be initiated………………
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