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New England Seafood Company Risk Analysis Paper

1015 Words5 Pages

TO: Dr. Jim Turner FROM: Tyler Mead DATE: October 20, 2015 SUBJECT: New England Seafood Company Risk Analysis Overview: Accompanying this memo is a risk analysis I have conducted for New England Seafood Company. The risk analysis I have conducted will show which weighted average cost of capital would be best to use in evaluating the project along with how New England Seafood Company could utilize the land if the project is accepted. A 10% cost of capital will result in a positive net present value but the coefficient of variation will be much higher than New England’s average coefficient of variation. A lower or higher cost of capital could under or over value the project and risks involved. I would consider this project as high risk and suggest that New England Seafood Company not get into the catfish market. Problem: New England Seafood Company has focused exclusively on …show more content…

This land was purchased by the Gulf Shrimp Processing Division. If this current site is used for the catfish project, then Gulf Shrimp would need to find a different site. The best option would be for the Gulf Shrimp Processing Division to take advantage of buying an option for $100,000 to buy the site in five years for $1,300,000 compared to having no option and the price being $1,500,000. Table 1 shows the present value of these options. By purchasing the land with the $100,000 option, the present value is $907,198 with a 10% interest rate, discounted five years. This can be compared to having no option, still with a 10% interest rate, discounted at five years for a present value of $931,382. Therefore, it would be best to use the current land for the catfish project and purchase the $100,000 option to buy the new land for the Gulf Shrimp Processing Division because the present value of purchasing the land with the option is less than with no option at

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