Project #19008 - Project for lecturer

 

You are employed as a financial analyst at Tyson Foods(Ticker: TSN). Your division is seeking funding for a new organic poultry line. The demand for “free range” organic poultry has increased over the last several years and your manager has tasked you with determining if the project is economically viable. The project will focus on the consumer market and associating Tyson with providing organic poultry for home consumption. If the project produces a viable revenue stream the organic poultry line will be expanded to other regions of the country and may find expansion into providing organic poultry for restaurant clients.

 

The company wants to launch the project in spring and the project has a projected life of seven years. (If the project is accepted, it will surely have a longer useful life, but management wants to be conservative in its analysis. In other words, if it does not pay off in seven years they don’t want to do it.) FASB rules indicate the project investment should be depreciated using a 15-year useful life with the MACRS depreciation schedule (see Table A-1 http://www.irs.gov/pub/irs-pdf/p946.pdf). Tyson Foods has spent $192 million in market research and supply-chain development for the project over the last four years. The project requires an increase of $118 million in working capital. An initial investment of $274 million in production facilities is required to undertake the project. When the project is completed in seven years, the company will reclaim $90 million from the repurposing and reallocation of the facilities.

 

The forecasts for the project state that the revenue from the project will initially start at $265 million and are expected to increase at a rate of 8.25 percent annually for each of the following 7years. The variable costs associated with the project are expected to be 15 percent of the revenue generated annually. The fixed costs attributed to the project are $202 million and will increase by 3.2percentover the life of the project. The working capital requirements of the project are such that the firm will need to increase working capital by 5 percent per year for the project. The firm is subject to the corporate tax rates of 35 percent. The project has a risk in excess of the company’s current risk from operations of 4.5 percent.

 

Your job is to prepare an analysis of the project and prepare a brief report explaining whether the firm ought to undertake the project. You should consider various evaluation techniques such as NPV and IRR for the analysis. Include in your report any assumptions and sources that you use for discussion and data. Stock and financial data for the firm can be found at Yahoo! Finance1, data to determine the market risk premium is available in an academic working paper by Fernandez, Aguirreamalloa and Avendaño2, treasury rates can be found from the U.S. Treasury3, and bond data is available from the Financial Industry Regulatory Authority4.

 

You will need to submit a copy of a memorandum and an excel spreadsheet model detailing your cash flows. The memorandum should be no more than 2 pages single spaced. You may include additional materials in an appendix (referred to in the memorandum) and any appendices will need to be submitted separately from the memorandum. For a good example of how to write a memorandum, see the Purdue Online Writing Lab5.

Additionally, Microsoft Word has a template that you can use for your memorandum.

 

 

1http://finance.yahoo.com/

 

2Fernandez, Pablo and Aguirreamalloa, Javier and Avendaño, Luis Corres, Market Risk Premium Used in 82 Countries in 2012: A Survey with 7,192 Answers (May 15, 2013). Available at SSRN: http://ssrn.com/abstract=2084213or http://dx.doi.org/10.2139/ssrn.2084213

 

3 http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

4 http://finra-markets.morningstar.com/BondCenter/Default.jsp

5 http://owl.english.purdue.edu/owl/resource/590/1/

 

http://www.irs.gov/pub/irs-pdf/p946.pdfhttp://finance.yahoo.com/http://ssrn.com/abstract=2084213http://dx.doi.org/10.2139/ssrn.2084213http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldhttp://finra-markets.morningstar.com/BondCenter/Default.jsphttp://owl.english.purdue.edu/owl/resource/590/1/

 

Subject Business
Due By (Pacific Time) 12/06/2013 01:00 pm
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