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Eskimo Pie Essay

2918 words - 12 pages

Case 2: Harris Seafood
Finance 380: Cases in Financial Decision Making
Bojan Balaban, Tijo Jose, Nathan Liu

NPV CALCULATIONS

Charlie Harris is debating whether or not he should make an investment in the shrimp processing plant. We have concluded that he should make the investment in the processing plant if net present value (NPV) is positive. The NPV is calculated as:

NPV= PV(benefits) – PV(cost)

The goal here is to create value. Mr. Harris should only invest if the NPV is positive. To calculate the NPV of the processing plant, we are required to forecast a FCF and a discount rate. We have used the data from the Harris Seafood case to arrive at a FCF projection for both an ...view middle of the document...

219984 | 1.48836 | 1.81578 | 2.21522 | 2.70254 | 3.29705 |
PV | $(2,935) | $(1,485) | $(1,119) | $889 | $1,442 | $1,192 | $989 |
| | | | | | | |
PV of FCFs | $272 | | | | | | |
Terminal Value | $11,636 | | | | | | |
Initial Outlay | $(7,000) | | | | | | |
NPV | $4,908 | | | | | | |

| FCR projection with 11% inflation |
Free Cash Flow ($000) | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 |
Revenues | $- | $28,999 | $70,376 | $92,669 | $104,557 | $118,059 | $133,267 |
Cost Of Goods Sold | $- | $25,339 | $57,708 | $75,989 | $85,737 | $96,809 | $109,279 |
Selling, General and Admin | $- | $3,190 | $7,741 | $8,804 | $9,933 | $11,216 | $12,660 |
Depreciation | $- | $833 | $787 | $758 | $746 | $748 | $764 |
Pre-Tax Op Profit | $- | $(363) | $4,139 | $7,119 | $8,141 | $9,287 | $10,564 |
Taxes (48%) | $- | $- | $1,987 | $3,417 | $3,908 | $4,458 | $5,071 |
Net Income | $- | $(363) | $2,152 | $3,702 | $4,233 | $4,829 | $5,493 |
| | | | | | | |
Total Current Assets | $2,935 | $8,348 | $17,784 | $23,417 | $26,422 | $29,834 | $33,677 |
Total Current Liabilities | $- | $2,610 | $6,334 | $8,340 | $9,410 | $10,625 | $11,994 |
Net Working Capital | $2,935 | $5,738 | $11,450 | $15,077 | $17,012 | $19,209 | $21,683 |
Change in Net Working Capital | $2,935 | $2,803 | $5,712 | $3,627 | $1,935 | $2,197 | $2,474 |
  | | | | | | | |
Free Cash Flows | $(2,935) | $(2,333) | $(2,773) | $833 | $3,044 | $3,380 | $3,783 |
Discount Factor | 1 | 1.14298 | 1.30641 | 1.49321 | 1.70671 | 1.950753 | 2.22968 |
PV | $(2,935) | $(2,041) | $(2,122) | $558 | $1,784 | $1,733 | $1,697 |
| | | | | | | |
PV of FCFs | $(2,479) | | | | | | |
Terminal Value | $13,402 | | | | | | |
Initial Outlay | $(7,000) | | | | | | |
NPV | $3,923 | | | | | | |

The future cash flows were estimated based on the data provided from Harris Seafood’s, Inc. in exhibits 6 and 7. Under the 11% inflation scenario, future free cash flows are slightly larger because inflation increased the price of products sold. However our discount rate is also larger, making the present value of free cash flows smaller.

In order to calculate the NPV of the processing plant, we needed to forecast a terminal value. Terminal value is an estimate that captures the present value of all cash returns from the processing plant beyond 1986.

We feel the best way find the terminal value of the plant is by estimating the sale price of the plant at the end of 1986. If we sold the processing plant in 1986, to a rational investor, that investor would pay an amount that is almost equal to the NPV of all future cash flows from the plant after the year 1986. If we sold the plant in 1986, that final sale price acts as a final cash payment that encompasses the cash flows we would have received if we held on to the plant.

Following this line of reasoning, we decided to use the liquidation value...

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