Auscann Group Holdings Limited is a listed entity on Australian Stock Exchange. The company is headquartered in Perth. The company is considering diversification by acquiring Magic Mushroom Tours, a tourism operator stationed at Cairns. Further, the company is considering acquisition of Reef magic 4. In this regard, a financial analysis has been undertaken whereby the proposed acquisition prospects have been analyzed in terms of Net Present Value (NPV) after considering the proposed outflow and inflow of the proposed expansion. Further, opportunity cost has been taken into consideration while evaluating the NPV and sunk cost are avoided as they are not significant in decision making.
Initial outflow of resources comprise capital expenditure on acquisition of vessel, increase in working capital and AMSA certificate. The net outflow in Year zero is AUD 3,921,000/-. Refer Excel Solutions for detailed work.
The certificate cost has been considered initial outflow to be in alignment with Time Value of Money.
The revenue from sales of ticket from year 1 to 10 is major source of revenue. Reduction in cost has been considered as income. The following elements have been considered as cost:-
- Opportunity cost of Cairns Reef Fleet Terminal;
- Wages;
- Depreciation on Reef Magic;
- Fixed Operating Expense;
- Fuel Expense;
- Annual Repair and Maintenance;
Further, following factor has not been considered for the purpose on analysis :
- Sunk Cost i.e. report cost;
- Data in Para 6 of the questionnaire (Not a relevant cost);
- Payment of dividend;
- Accounting depreciation as tax depreciation has been considered;
- Account Payables
Further, with respect to para 13, the answer to the enquiry by the Managing director is no and the food expense is not an opportunity cost.
Further, it has been assumed that company is earning profit from other business as the tax loss setoff has been considered for analysis.
Terminal cash flow is net of tax w.r.t the disposal value of assets and a decrease in working capital requirement. Also, outflow with respect to ASMA certificate has been considered.
On the basis of above analysis, NPV has been computed by discounting the cash flow @14% which tantamount AUD (3,101,244) and accordingly the project is not viable as the present value of cash flows are negative from the view point of shareholder.
However, the ticket price above $ 231 can only make the project NPV negative and hence if the company intends to profit from it, then it should ensure a minimum $231 as ticket price.
Comment: The project shall not be accepted as it high negative NPV.
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