Grow Corp is a medium sized commodity producer. It is already involved with indu

Question

Grow Corp is a medium sized commodity producer. It is already involved with industries such as oil and gas, forest products and gold exploration. Grow Corp operates in Australasia as well as in North America and the company exports everywhere in the world. The General Manager of Grow Corp. Mr Tandon Nanczos, is very much in favour of expanding operations into new markets and is considering developing a new plant that will specialise in the production of cannabis for medicinal and legitimate business activities. Legitimate cannabis cultivation for industrial hemp is estimated to yield up to $800 per acre. Mr Tandon Nanczos is considering the implementation of the following strategy in order to produce hemp for the domestic market. STRAGEY HEMP involves the traditional method of purchasing a block of land in central Victoria and establishing the site for productive measures. Mario Williams, a financial analyst, has prepared estimates of the initial investment, the net cash inflows associated with each method given two future possible states of the world. Note that Mario plans to analyse each alternative over a five-year period. At the end of that time, the equipment required for each method would be sold, thus accounting for the large final year cash inflow. Mario believes that, due to the operation will have no impact on the film's overall risk. It is therefore decided to use the films' 12% cost of capital when analysing the proposed project. Mario would like you to estimate the following: Expected Net Present Value [E(NPV)] I Standard Deviation [o(NPV)] Coefficient of Variation [CV(NPV)]

Explanation / Answer

Best Case Cash Flow Discount rate NPV Year 0             -3,750,000     -3,750,000 year 1              1,126,000 12%       1,005,357 Year 2              1,351,200 12%       1,077,168 Year 3              1,621,440 12%       1,154,109 year 4              1,945,728 12%       1,236,545 year 5              2,237,587 12%       1,269,667 Total NPV       1,992,847 Worst Case Cash Flow Discount rate NPV Year 0             -3,750,000     -3,750,000 year 1                 975,000 12%          870,536 Year 2              1,121,250 12%          893,854 Year 3              1,255,800 12%          893,854 year 4              1,368,822 12%          869,911 year 5              1,450,951 12%          823,309 Total NPV          601,463

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