New England Seafood Company

New England Seafood Company

        The objective is to complete a financial analysis for the proposal of a 2-stage, strategic move into the catfish market. Stage 1 involves the construction of several catfish ponds and a processing plant of limited capacity. Stage 2 involves the construction of a major facility which would house the entire fresh-fish processing division. Assuming only Stage 1 is undertaken, NPV is -$2.619 mil., IRR is 5.97%, MIRR is 7.26%, and Payback Period is 7.61 years. Assuming both stages are undertaken, (assuming a 70% probability of high demand, 30% probability of low demand, WACC of 10%) expected NPV is $1.178 mil.

Now assume both stages are undertaken but WACC is 13% because of the increased risk of entering a new market, the overall risk-adjusted NPV becomes -$2.073 mil. Additionally, the company has never produced or sold fresh water fish, so they can’t accurately predict time constraints, demand and proper variable costs that go into the process. Overall, there is too much uncertainty involved in the 2-stage proposal, therefore this project should be rejected.

A stand-alone analysis was done for Stage 2. During this stage the company assumes a 70% probability of high demand and a 30% probability of low demand. Included below is a chart showing the impact that each demand scenario has on the project’s acceptance criteria. Accordingly, assuming low demand, NPV at December 31, 1996 would decrease $11.392 mil., or a percentage change of -1047%. Assuming low demand, today’s NPV would decrease $6.430 mil., or a percentage change of -1047%. Assuming low demand, IRR would decrease 13.68% or a percentage change of -61%, and MIRR would decrease 10.31% or a percentage change of -53%.    [pic 1]

The company assumes a 25% sales increase per year during operation and variable costs of 60% per unit. But these are estimations and not certainties. To illustrate other potential combinations, a what-if analysis was constructed and is included below. The chart indicates that the Stage 1 NPV becomes positive only when variable costs are below 55% and sales increase per year is above 11%. The company’s vice president is concerned that variable costs could be closer to 70% or even 75%. In the chart, I have bolded the Stage 1 NPV for both of those conditions, while keeping the 10% sales increase per year. [pic 2]