Glenorna Coffee Case Study Report

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CORPORATE FINANCE

GLENORNA COFFEE

CASE STUDY REPORT

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                      Submitted by: Sumayya Ali

                                    Subitted to: Dr. Manuel Fernandez

                                       Reg no: 13267

CASE SUMMARY

Glenorna coffee, a manufacturer and exporter of coffee powder, had been within the business of instant coffee and roast ground blends for thirty four years. It sourced coffee from India and had consumers across the world. In 2013, the owner of Glenorna had to make a decision whether or not  to  pursue backward integration and acquire coffee gardens. Ranjan Appachu, the owner of Glenorna Coffee wants to find out whether or not it was viable to venture into the acquisition of coffee plantations or if the firm should continue with its existing business operations. With backward integration, Glenorna had a much better probability of getting into the specialty coffee business. Should Glenorna buy plantations and get into the specialty coffee business?

The case emphasizes the suitability of net present value (NPV), internal rate of return (IRR) and payback period as appropriate performance measurement tools.

Given information:

We assume that Glenorna Coffee will acquire a mature plantation. Thus the cost of acquiring a mature plantation will be ₹800,000 per acre. The required quantity of coffee per year is 3000000 kg (3000 MT) and the required acre of land can be calculated as follows:

= 3000000 / 750

= 4000 acres

The cost of acquiring 4000 acres of land can be calculated as follows:

= ₹800,000  * 4000

=3,200,000,000

The cost of acquiring machinery and vehicles would be ₹200 million, with an expected service life of 20 years, which means the depreciation amount will be 10 million (200 mln / 20 ).

The initial investment: 3,200,000,000 (cost of land)  + 200,000,000 (machinery) + 9,870,000 (working capital 10%)  

Other crops that grew alongside coffee included pepper and cardamom. Their individual maintenance cost was estimated to be 10 per cent that of coffee. Their yields were 500 kg per acre for pepper and 200 kg per acre for cardamom. Thus the total savings can be calculated as follows:

=Cost of purchasing beans: 135 * 3,000,000 = 405,000,000

+ Revenue from pepper: 280 * 4000 * 500 = 560,000,000

+ Revenue form cardamom: 540 * 4000 * 200 = 432,000,000

= 1,397,000,0000

The overheads cost  would be 0.173 per cent per annum of the cost of purchasing the land for the plantations, which will be  

3,200,000,000 * 0.173 = 5536000

It was anticipated that annual advertising and packing charges of ₹1 million each were required owing to the acquisition of the plantations.

Total operating cost per acre of production of dried coffee cherries is 24,675. Total operating cost for 4000 acres would be 24,675 * 4000