Essay About Capital Budgeting Process And Cost Of Debt Capital

Glenorna Coffee Investment Appraisal
Assignment TitleGlenorna Coffee Investment AppraisalAssessment Learning Outcomes This assignment is designed to assess learning outcomes: MLO1 – Analyse the capital budgeting process and distinguish among the various categories of capital projects.MLO2 – Critically analyse the use of target capital structure in estimating WACC and how target capital structure weights may be determined. Calculate and interpret the cost of debt capital using the yield-to-maturity approach and the debt-rating approach.MLO3- Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus risk-premium approach.Details of the taskThis is a Group Coursework, requiring production of a Report investigating an Investment Appraisal situation and evaluating whether the proposed investment would create value. Case Study: Glenorna CoffeeYou are advising Ranjan Appachu and Raj Shankar at Glenorna Coffee on the merits of buying a mature plantation of coffee bearing plants. They believe that once the plants are mature the annual savings compared to buying beans in the market are (million):own beans672.4peppers628.72cardamon482.4The yield from the plants will be 20% in the first year, 40% in the second, 60% in the third, and 80% in the fourth, before a full yield in year 5 and beyondIncremental annual operating costs are expected to be:Labour cost pa0.612Annual utility expenses0.262Additional charges2Other overheads6.325Depreciation-10Interest-143.735 Glenorna have decided to assume that the annual savings from growing their own plants, and the operating costs are unchanged for the life of the plantation.