International Food Genetics (IFG) – Board of Directors Investment Viability Paper
Executive Summary
Proposed Investment Marketing and distribution of a range of genetically engineered vegetable seeds developed by 3rd party biotechnology firm
Cost of Investment £ 500,000
NPV £ 90,316
IRR 8.60%
Payback Period
55 months (4 years and 7 months)
Cash Flows (£ ‘000)
C0 C1 C2 C3 C4 C5 IRR Payback Period (years) NPV@7%
Project -500 -1300 300 300 300 1,500 8.60% 4.6 £ 90,316
Table 1: Summary of analysis for the project
Recommendation
In assessing the project, three methods have been used; net present value (NPV), internal rate of return (IRR) and payback. In view of the project’s positive NPV and IRR that is higher than the discount rate, it is recommended that the board approve the proposed investment. Although the payback period is 5 months short of the planned end of project, the positive NPV of £ 90,320 demonstrates this project will add value to the shareholders. In the subsequent section will detail out the basis for the recommendation. Apart from the financials numbers, market research commissioned by the company has established that there is a demand for genetically engineered vegetable seeds.
Investment Analysis
IFG is looking into marketing and distributing a range of genetically engineered vegetable seeds developed by a third party biotechnology firm. The firm will supply the seed and permit IFG to market the seeds under license. Market research commissioned by IFG has shown demand for the seeds and the intention is to sell the seeds for 5 years.
In analysing the proposal, three methods were used to determine the financial viability of the project, namely NPV, IRR and Payback. The decision to approve should depend on the financial viability of the project and its ability to add value to shareholders. The project cash flows were forecasted and were used as the basis of the calculation. A discount rate of 7% was applied given the risk of the...