Firms in the domestic fruit and vegetable processing industry have struggled with increasing external competition over the past five years. Rising import penetration and high operating costs have negatively affected industry performance over this period.

Firms in the domestic fruit and vegetable processing industry have struggled with increasing external competition over the past five years. Rising import penetration and high operating costs have negatively affected industry performance over this period.
Aussie Growers Company is a newly listed agricultural company on the Australian Securities
Exchange (ASX). Aussie Growers Company operates a variety of fruit farms throughout
Australia and their products are supplied to major supermarkets and food retailers, both
domestically and internationally. Aussie Growers Company is considering using part of the
proceeds from its IPO for a project to expand its current product line-up.
A detailed financial analysis is required to ascertain if this new project will contribute to the
wealth of shareholders. You have been tasked to collect relevant information and to use the
finance skills that you have learnt in Corporate Finance I for Aussie Growers Company. Your
report will be provided to the Board of Directors who will then formally decide whether to
proceed with this investment project or not, based largely on your final recommendation.
FINC2011 Corporate Finance I Semester 2, 2020
Aussie Growers Company is considering the introduction of a new range of organic cold-pressed
gourmet juices that will be distributed through high-end food retailers such as David Jones’ Food Halls.
This would enable the company to use its surplus fruit production that is currently going to waste.
They hope to capture new consumers who are concerned with leading a healthy life and who want
the convenience of fruit drinks.
The project requires Aussie Growers Company to purchase a new industrial juicing machine and
although this represents a large capital expenditure today, the project cannot proceed without it. The
machine cost $990,000 plus it would need to be installed into the factory at a further cost of $150,000.
Over the last year, Aussie Growers Company has spent $120,000 in research and development relating
to juicing machines that extract maximum fruit pulp from whole fruits. The equipment is very large
and would require that the company expand into the industrial unit next door. The unit was purchased
4 years ago for $350,000 and is currently rented out to Premier Pet Food. Next year’s rent had been
set at $120,000. Given the current rental market in Australia, the annual rent thereafter was
anticipated to decrease by 3% p.a. The juice project would require the immediate cancellation of this
agreement which Aussie Grower’s is able to do without penalty.
The company also needs to borrow $850,000 today to help finance the project, which includes a new
advertising campaign. The five-year interest-only loan has a fixed interest rate of 3.2% p.a. for
commercial borrowings, which equates to $27,200 each year. The advertising campaign will cost the
company $750,000 today and then they will maintain it at 6.5% of their total anticipated revenues for
each year of this product in order to penetrate the juice market and then to maintain their market
share. The company’s tax accountant has advised that advertising can be claimed as a tax deduction
at the time the expense is incurred.
Aussie Growers Company will sell each 1.5 litre juice bottle for $8.99. Each bottle requires
approximately two kilos of fresh fruit. The variable costs per bottle are $1.90. The project would
require the company to employ an additional five full-time workers at a cost (in the first year) of
$50,000 p.a. each. The company has an enterprise agreement in place with their employees that
would result in these wages increasing by 3% p.a. for the life of the project. Other annual fixed costs
will be $95,000 in the first year but these are predicted to grow by 8% p.a. Aussie Growers Company
commissioned Traffic Brand Agency to conduct a marketing study into the number of proposed juice
customers and overall size of the fruit juice market. This study cost Aussie Growers Company $350,000
one month ago. The predicted sales units are:
1 2 3 4 5
Sales Units 170,000 200,000 265,000 225,000 180,000
Currently Aussie Growers’ product lines include the sale of freshly prepared and pre-packaged fruit
salad. It is anticipated that 22% of their juice sales (in units) will come from customers who would have
otherwise purchased the fruit salad product for $7 per container. They anticipate that this rate and
price would remain constant for the next five years.
FINC2011 Corporate Finance I Semester 2, 2020
The juicing project will require an initial increase in inventories and accounts receivables by $50,000
to get production started. The total investment in net working capital will need to be maintained at
15% of the dollar value of sales for that year. All working capital will be liquidated at the termination
of the project after 5 years as it is replaced by new juicing techniques that dissolve the fruit pulp into
edible capsules.
The Australian Taxation Office has ruled that the equipment will have an estimated useful life of ten
years, over which the installed cost of the machine must be depreciated to zero. The juicing machine
is expected to be sold to Juice and Co. for $650,000 at the end of the project’s life. The applicable
company tax rate for Aussie Growers is 30%.
If the Board of Directors approves of the juicing project, they will commit to a special one-off dividend
of amounting to $750,000 for all shareholders at the end of the project’s life in anticipation of its
success.
Required:
1. Select one proxy company that can be used to determine a possible beta for Aussie Growers Company. Explain why this is necessary. Justify your choice and briefly describe its operations.
2. Calculate the beta using your proxy company. Justify your data choices and all your assumptions.
3. Determine an appropriate beta for Aussie Growers Company if this company has a target debt-to-equity ratio of 0.5.
4. Using the Capital Asset Pricing Model, calculate the required rate of return of Aussie Growers Company. Justify your data choices.
5. Present a detailed net cash flow table based on the relevant information for this project.
6. Provide a final recommendation to the Board of Directors as to whether Aussie Growers Company should invest in this project or not.