Harris Seafoods Case Study Analysis
NPV
The net present value is the change of the present value of cash inflows and outflows, for a period. The decision of the company to construct a processing plant is dependent on NPV, as it is used to find whether the investment is profitable or not. The NPV of this project is 58682, which shows that the investment will provide return at the expected rate of return. The NPV is calculated with the free cash flows and the discount rate.The positive NPV is showing that Mr. Harris should invest in this project. (See Exhibit 1)
APV
The adjusted present value is the same as the net present value of the investment. It is also a method that will help Mr. Harris that whether he shouldinvest in this project or not. This method uses the discount rate and cost of equity. This is an effective method because of the debt financing advantage. The Harris Seafoods will receive a debt financing advantage of $454. The APV of the project is 60571 that shows positivity in the investment. (See Exhibit 3)
Sensitivity Analysis
The value of the project will also be calculated based on sensitivity analysis.The sensitivity analysis defines how the value of the independent variable is different from the dependent value. It is also known as what-if analysis. To perform a sensitivity analysis of the project; the growth rates are 4%, 6%, 8%, and 10%, and WACC is 18%, 16%, 14%, 12%, and 10%. The discount rate sensitivity indicates the variation in the NPV of the project as a result of changes in the discount rate. If the discount rate is 18% and the growth rate is 4%; the NPV of the project will be negative. If the discount rate is 18% and the growth rate is 6%; the NPV of the project will be negative. If the discount rate is 16% and the growth rate is 4%; the NPV of the project will be negative. If the WACC is 10% and the growth rate is also 10%; the NPV of the project will again be negative. The NPV will be positive in the rest of the percentages of WACC and growth.
Recommendation
All the calculations have been made for the cash flows, free cash flows, discounted cash flows, and WACC, NPV, APV and sensitivity analysis, it is noticed thatmost of these calculations indicated towards a positivity for the investment in the shrimp processing plant. If the company does not use Industrial Revenue Bond, then it can opt to go with this project as it is allows Harris Seafoods to have a substantial growth in the market. Other alternatives of financing, such as: funds of investment from the parent company and current liabilities are also expected to be useful for the success of the project. There are other opportunities for this investment as well, which could beavailed through the sales area as well asan efficient utilization of the company’s resources.The NVP of the project is also greater than 0, suggesting that Mr. Harris should invest in this project............................
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