Accounting

International Food Genetics As the newly appointed financial manager of International Food Genetics (IFG), you are about to analyse a proposal for the marketing and distribution of a range of genetically engineered vegetable seeds, which have been developed by a biotechnology firm. This firm will supply seeds and permit IFG to market and distribute them under a licence. Market research, costing £100,000, has already been carried out by IFG to establish the likely demand for genetically engineered vegetable seeds. After five years IFG will stop selling these seeds as the company anticipates that this product will be superseded by newer biotechnological developments. The annual payment to the biotechnology firm will be £1m for the licence; this will be payable at the end of each accounting year. £500,000 will be initially needed to buy a fleet of vehicles for distribution. These vehicles will be sold at the end of the fifth year for £200,000. The project will require packaging and administrative facilities. IFG is a large firm and has a suitable factory with offices, currently lying unused. The Head Office has stated that they will let this space to your project at a reduced rent of £200,000 per annum payable at the end of each accounting year. However, the open market rental value is £1m per annum. The project would start in 2008 and would not be subject to any taxation because of its special status as a growth industry. A relatively junior and inexperienced accountant has prepared forecast of profit and loss accounts for the project as shown in the following exhibit. Exhibit Year 2008 2009 2010 2011 2012 £’000 £’000 £’000 £’000 £’000 Sales 5000 6000 6000 6000 6000 Costs Market research 100 Raw material (seeds) 2000 2400 2400 2400 2400 Licence 1000 1000 1000 1000 1000 Vehicle fleet depreciation 100 100 100 100 100 Direct wages 500 500 500 500 500 Rent 200 200 200 200 200 Overheads 500 500 500 500 500 Variable transport costs 500 500 500 500 500 Profit 100 800 800 800 800 Please ensure you include your student number and the assignment reference (CF/Student Number/Jul13/1) in all submitted assignments and that assignments are paginated. Failure to do this may lead either to a grade not being assigned or being wrongly assigned By expanding its products range with these new seeds, the firm expects to attract a great deal of publicity which will improve the market position, and thus the profitability of its other products. The benefit is estimated to be £100,000 for each of the five years. Head office normally allocates a proportion of its costs to any new project as a part of its budgeting/costing process. This will be £100,000 per annum for this project and has been included in the ‘overheads’ calculated by the accountant. The remainder of the overheads is directly related to the project. The direct wages, seed purchases, overheads and variable transport costs can be assumed to be paid at the end of each year. Sales revenues are also assumed to have been received at the end of each year. The project requires a working capital of £1m which needs to be in place at the start of the project. This amount will be recovered at the end of the project. Assume that there is no inflation. Given the riskiness of the project, a discount rate of 7 per cent is appropriate. Required (a) Prepare the case, with recommendations, to be presented to the Board of Directors of IFG. You should assess the viability of the proposed project using the NPV, IRR and payback methods. (b) “The IRR rule is redundant as an investment criterion because the net present value (NPV) rule always dominates it.” Discuss this statement giving examples where possible. The word limit for answers to questions (a) and (b) is 2500 excluding tables and references. Information on the deadline for submitting this coursework and MBS rules on assignments can be found on Blackboard.