Mgt 252 Module 6 Exercise

CASE STUDY: Building a Fertilizer Plant to Serve the Fertilizer Needs of
Provinces A, B, C, and D in Asiandia

Background
Provinces A, B, C, and D of Asiandia are agriculturally poor provinces. The basic problem in these provinces has been lack of water. A recent hydrological survey conducted by a German firm working with the Asiandia State Hydrological Survey Organization has discovered a large aquifer under these provinces. It is estimated that the water contained in this aquifer can dramatically improve the crop production capabilities of these provinces. In addition, water
can be diverted from some nearby rivers to augment provincial water needs.
Should these provinces become agriculturally productive, it would seriously strain current fertilizer production capabilities in Asiandia. Therefore, Asiandia’s Ministry of Agriculture concludes that special attention should be given to constructing a new fertilizer plant whose output would be directed at meeting the fertilizer needs of these four poor provinces.

Results of a Feasibility Study
A feasibility study was carried out to see what the costs and consequences would be of building the fertilizer plant. Basic data on anticipated costs and benefits are provided in Exhibits A and B respectively.

Assignment

1. Using the data in Exhibits A and B, what are some alternative techniques we can take to assessing the merits of this proposed project? What specific conclusions would we derive from each of these approaches?

2. Assess the conclusions we might make about the wisdom of undertaking this project under the following circumstances:

a. Cost of capital = 0% b. Cost of capital = 3% c. Cost of capital = 15%

3. Create benefit-cost ratios for the three cost of capital scenarios posited here.
To what extent does a benefit-cost ratio analysis support the conclusions you derive using a net present value analysis?

4. At what point does payback occur on this…