FINANCIAL MANAGEMENT

Lochside Liquors Limited



Table of Contents

Introduction1

The three project options1

Project Liqueur1

Project Rye1

Project C - combination of Project Liqueur and expansion of Highland Princess2

Capital Budgeting2

Project investment measures2

Net present value (NPV)4

Internal Rate of Return (IRR)6

Payback Period7

Investment decision8

Group process report10

References14

Lochside Liquors Limited

Introduction

Lochside Liquors Limited (LLL) is a well renowned company famous for its flagship brand Highland Princess. Highland Princess is a Scotch whisky that is doing very well in the local market. The management is considering expanding the Highland Princess to other markets such as South Asia and Far East. The company also has two other projects in mind. These are development of new products - one is a whisky based liqueur similar to Drambuie, the other is a new cheaper variety of whisky made from rye. Either project would need the same amount of factory space. The factory has an access space available with it which is £50,000 square feet. This space is enough for both the projects. However, the factory space will require renovation that will cost the company £20,000.

The three project options

The details of the three projects are as follows:

Project Liqueur

The company wants to set up a liqueur plant whereby it wants to increase its product line and move from manufacturing Scotch whiskey to Liqueur.

Project Rye

The company is considering expanding into the slightly inexpensive and lower quality variety of whiskey for the price sensitive market.

Project C - combination of Project Liqueur and expansion of Highland Princess

A third project is where the company wants to combine the two projects. It wants to expand on the Highland Princess whiskey whereas at the same time invest in the Liqueur project. It wants market development for Highland Princess by taking it to new markets such as South Asia and the Far East.

It is important to note here that Lochside Liquors Limited has a capital budget limit of £400,000 and this capital budget cannot exceed under any circumstances. Moreover, the company cannot reduce the size of any of these projects. If it will take up a project, it will either take it up fully or leave it completely (Rosenbloom 2003, P. 24).

Capital Budgeting

Project investment measures

The initial investments for the three projects are given as follows:

INITIAL INVESTMENT - Project Liqueur

Investment

$185,000 - Tax Credit

$46,250

Net Investment

$138,750 + Working Cap

$45,000 + Opp. Cost

$25,000 + Other invest.

$0

Initial Investment

$208,750

INITIAL INVESTMENT - Project Rye

Investment

$320,000 - Tax Credit

$80,000

Net Investment

$240,000 + Working Cap

$45,000 + Opp. Cost

$25,000 + Other invest.

$0

Initial Investment

$310,000

INITIAL INVESTMENT - Project C

Investment

$385,000 - Tax Credit

$96,250

Net Investment

$288,750 + Working Cap

$30,000 + Opp. Cost

$0 + Other invest.

$0

Initial Investment

$318,750

It is clear from the above calculations that Lochside Liquors Limited cannot undertake any two projects simultaneously owing to capital budget constraints. Thus, Lochside Liquors Limited has evaluated the three projects on the basis of the following three criteria (Forgue 2010, p. 9).

Net Present Value (NPV)

Internal Rate of Return (IRR)

Payback period

Net present value (NPV)

Net present value is an important valuation framework in capital budgeting. It forms the basis for many decision ...