MT480 Unit 10 Board Financial Decision Report Example

Accept, With Four Numbers to Watch: An MT480 Unit 10 Financial Decision Report on a $107.5 Million Expansion

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Purdue University Global

MT480: Corporate Finance

Unit 10 Financial Decision Report

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[Date]

Brandywine Hollow Mushrooms, its board and every figure are composite; the sources cited are real.

Recommendation

The board should approve the growing house expansion, funded about 45 percent with new notes and 55 percent with new equity, subject to three conditions set out below. Discounted at 8.5 percent, the project is worth about $13.46 million more than the $107.5 million it costs. That margin is real but thin, about 12.5 percent of the investment, and the decision would reverse if any of four figures moved by an amount within the range of recent experience. The board should approve the project knowing exactly where those lines are and how close they sit.

The Term's Evidence, in One Place

The report rests on the work of the preceding units. The grower's cost of capital, weighted at market values, is about 7.96 percent, with a range of 7.54 to 8.38 percent across plausible betas. The hurdle rate for growth projects, 8.5 percent, sits above that range. At that rate, the expansion's net present value is about $13.455 million, its internal rate of return about 10.08 percent and its payback about 8.57 years. It ranks ahead of a smaller energy retrofit, which has a higher rate of return but less than half the value, and the two can both proceed if financing allows. The financing analysis found that all-debt funding would breach the term loan's covenant in a gas-spike year, while a 45 to 55 split of debt and equity stays inside it.

What Could Overturn the Answer

A switching value is the level an input would have to reach for the project's net present value to fall to zero, with every other input unchanged. Four inputs matter most.

Price. The expansion assumes a blended price of $1.72 a pound. Net present value reaches zero at about $1.6323, a fall of about 5.1 percent. Mushroom prices to packers have moved by more than that within a single year, which makes price the most important figure to watch.

Variable cost. The expansion assumes variable cost of $0.83 a pound, covering compost, spawn, harvesting, cartons and fuel. Net present value reaches zero if variable cost rises about 10.57 percent, to about $0.9177. A gas-price spike lasting several years could do that on its own.

Construction cost. The buildings and equipment are budgeted at $104 million. Net present value reaches zero if they overrun by about 14.6 percent, to about $119.18 million. Overruns of that size are not unusual for large agricultural construction.

The ramp. The analysis assumes the new rooms produce at six-tenths of capacity in their first year and nine-tenths in their second. If the whole ramp slips by a year, the project's value shrinks to roughly $29,000, effectively nothing.

A five percent fall in price, or a one-year delay in the ramp, would erase the project's entire margin.

Conditions of Approval

Because the margin is thin, the report recommends approval with three conditions, each aimed at one of the switching values.

First, price contracts. Before construction begins, management should sign supply contracts with grocery chains and packers covering most of the complex's first-year output at prices at or above $1.72 a pound. This protects the input most likely to reverse the decision during the ramp, when output is lowest and every dollar matters.

Second, a fixed-price construction contract. The general contract for the growing rooms and compost wharf should be fixed-price, with penalties for delay, so that a construction overrun falls mainly on the contractor rather than on the grower.

Third, staged construction payments. Payments should be tied to completed growing rooms, so that if the first rooms underperform, the board can slow or halt the remaining construction before all $104 million is committed. This turns part of the project into a series of options, which Brealey et al. (2020) note can be valuable precisely when outcomes are uncertain.

Risks Not Captured by the Switching Values

Each switching value moves one input at a time. In practice, inputs move together: a gas spike raises variable cost and may also weaken retail prices if consumers cut back. A combined fall of 3 percent in price and a 5 percent rise in variable cost, each well inside its own switching value, would leave the project about $0.8 million below zero. The board should treat the switching values as warning lines, not as independent safety margins.

Monitoring After Approval

Approval should not end the board's attention. Each quarter, management should report four figures against their switching values: the average realized price, variable cost per pound, construction spending against budget and the share of capacity reached by completed rooms. A simple table showing each figure, its plan value and its switching value would let directors see in a minute whether the project is drifting toward a reversal. If any figure crosses halfway to its switching value, management should present a recovery plan at the next meeting. If two figures do so at once, the board should consider pausing the remaining staged payments. This kind of monitoring turns the analysis in this report from a one-time justification into a tool for managing the project as conditions change.

Why Approve at All

Given the thin margin, one director might ask why not wait. Waiting has a cost: the grower's main grocery customer has asked for more volume in two years' time, and a competitor is planning a complex in the same region. Ross et al. (2022) observe that the option to delay a project has value only when waiting produces information that changes the decision; here, the most useful information, contracted prices, can be obtained before construction begins, which is exactly the first condition. Graham and Harvey (2001) found that managers often rely on payback and intuition when margins are thin; this report instead asks the board to approve on value while managing the specific risks that could erase it.

Proposed Resolution

The board approves the growing house expansion at a budget of $107.5 million, financed with about $48.4 million of notes and about $59.1 million of equity, subject to signed price contracts for most first-year output, a fixed-price construction contract with delay penalties and payments staged to completed growing rooms. Management will report actual price, variable cost, construction spending and ramp progress against the switching values each quarter.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.

Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2022). Fundamentals of corporate finance (13th ed.). McGraw Hill.