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FINC2012
Group Assignment
Instructions
Beef is a staple meat in Australian cuisine and is widely enjoyed in various forms such as steaks, burgers,
roasts, and stews. In Queensland, beef from local farms is especially prized for its freshness and quality.
The largest beef processing company in Queensland, Oakey Beef Exports (OBE), wants to build and
open a new beef production facility in Richmond in January of 2023. Currently, OBE holds a patent for
beef production, that is, a method of tenderizing beef: this patent covers a specific process and
technology for tenderizing beef via a combination of using enzymes, mechanical tenderization
techniques to improve the texture and palatability of beef.
We have the following assumptions, with all values in nominal terms, unless otherwise stated:
1) Project life is 10 years.
2) Production output is 250,000 kg per year.
3) OBE needs 12 months to reach full production capacity.
4) Because of the patent ownership, OBE is expected to sell the beef at $15 per kg.
5) Production cost is fixed at $5 per kg.
6) Inflation rate is assumed to be 2% and fixed forever.
7) Tax rate is 30%.
8) New road access to the farm costs $1 million.
9) Initial investment costs $9 million, assuming straight line depreciation over 10 years.
10) Discount rate (in real terms) is 10%.
11) Salvage Value is $1 million.
Q1: Calculate the value of the project by running a capital budget analysis. Include a screenshot of your
working Excel sheet in the Appendix. What is your recommendation? (20 marks)
Q2: Run a sensitivity analysis based on a 1% change in these five value drivers: (20 marks)
a) Unit production cost.
b) The price of beef per kg.
c) The inflation rate.
d) The discount rate (in real terms).
e) Initial investment cost.
Compare and discuss the impact of these drivers on the project value. Include a screenshot of your
working Excel sheet in the Appendix.
Further, you have been informed that OBE will hold the patent for 5 years and once it expires,
competitors will enter the market in year 5 and carry on with full production capacity from year 6,
indicating a perfectly competitive market.
Q3: Using the new information on the competitors, compute and discuss the following values: (10 marks)
a) What is the price of beef per kg required for this project to reach break-even NPV? Include a
screenshot of your working Excel sheet in the Appendix. (5 marks)
b) What would be the revised value of the project? Include a screenshot of your working Excel
sheet in the Appendix. (5 marks)
2
New information has revealed that an unexpected event occurred in December of 2022, in Richmond,
where a Queensland Rail train, comprising many freight carriages, experienced a derailment on the
outskirts of the town. As a result, many carriages became entangled, igniting an inferno that emitted
orange flames and dense clouds of black smoke into the sky. The incident resulted in the release of
chemicals into the air, soil, and creeks leading into the nearby Flinders River.
In the following section, you are required to evaluate the value of the project by considering the impact
of the toxic chemical pollution event. Continue to assume that OBE will hold the patent for 5 years and
once it expires, competitors will enter the market and carry on with full production capacity from year
6, indicating a perfectly competitive market.
Q4: Continue to assume that competitors will enter the market and carry on with full production capacity
from year 6 (perfectly competitive market). Include a screenshot of your working Excel sheet in the
Appendix and discuss the key outcomes in the main body of your report for the following: (25 marks)
a) Assess a shock to the NPV of the project due to the toxic chemical pollution from the derailment
described above by running a simulation analysis. By assumption, the impact of the shock is
expected to skew the distribution of capital investment (capital investment factor) to the right,
that is, for the mean value of this factor to be greater than its median. Show all workings in an
Excel sheet and include it in your Appendix. (4 marks)
b) Present a histogram representing the NPV outcome distribution from the Monte Carlo
simulation. What is the most likely range of NPV values? (3 marks)
c) Approximate the minimum, the maximum, the average and the volatility of the NPV outcome
distribution. (4 marks)
d) Quantify and describe the changes in the NPV outcome distribution before and after you
changed the capital investment factor in part (a)? (4 marks)
e) Using the outcomes of parts (a), (b), (c) and (d), discuss the relative importance of the capital
investment factor (as a result of the shock) on the value of the project. (10 marks)
Q5: Upon learning of the tox chemical pollution, OBE believes it makes the beef business more
uncertain and may not have an appetite for this level of risk. They want to explore the best options to
capitalize on the patent. One of them is to sell the patent. An offer was made to buy the patent from you
for $600,000. This offer will expire in 1 year. An analyst estimates that given the recent development,
the value of the beef business will fluctuate at a rate of 25% per year. The current risk-free rate is 5% a
year. (25 marks)
a) Should OBE accept this offer now? Provide reasons for your recommendation. You can use the
NPV from Q1 as the basis for your analysis. Include a screenshot of your working Excel sheet
in the Appendix. (10 marks)
b) What is the minimum offer price that OBE should accept now? Include a screenshot of your
working Excel sheet in the Appendix. (10 marks)
c) In your view, does the unexpected event help to increase the value of the beef business from a
real option standpoint? Explain your answer. (5 marks)
3
General Requirements
Include a cover/ title page showing the student identification number (SID) of each group member. Do
not include your name. Include the percentage of contribution by each member next to each SID. For
example, if each of 4 students contributed equally to the assignment, then put 25% next to each SID.
The group leader must share a copy of the final version with all group members prior submission.
Maximum length of assignment: 4000 words excluding cover/ title page, tables, graphs, figures,
reference list and appendix. Penalties for going over the word limit will be applied as per faculty
assessment policy.
The appendix section does not have a word limit.
Do NOT include executive summary, introduction or conclusion sections. These sections will not be
marked.
Formatting requirements: A4 sized page, single line spacing, 1.5 cm margins and 11 point font size.
Tables, charts and figures should be clearly labelled.
Penalties apply for poorly presented work.
You must enumerate and label your answers for each part of the tasks clearly. (e.g. Task 1, Task 2, a. b.,
etc.).
Referencing: You are expected to use academic references to support your analysis and arguments.
Citations and the reference list must be prepared following one of the University of Sydney referencing
and citation styles. It is ideal to employ at least three
references to justify your arguments.
Writing: The logic of the answers must be easy to follow. There are expected to be no spelling or
grammatical errors and terminology should be clearly defined.
Professional presentation is highly encouraged.
Submit ONE Word or PDF document containing your report and ONE Excel document containing your
workings.
General Marking criteria
The criteria below will be followed when marking each part of the assignment:
1. The extent and quality of critical reasoning/critical thinking.
2. The demonstration of knowledge of relevant theory.
3. The successful usage and interpretation of relevant data.
4. The extent to which the work is clearly, concisely and professionally presented.