Investment proposal

Wonderland Theme park investment

Executive Summary
Global financial markets over the years have transformed and developed owing to the integration of financial markets driven by the revolution brought about by globalisation and internationalisation. Investors today are looking to capitalise on the first possible investment opportunity, with the intention to grow and make financial gains. These developments have however even transformed the role of corporate and project finance, surfacing their importance as a significant investment analysis tool, looking into both the financial and non financial feasibility of an investment project. The undertaken report, for Wonderland Confectionaries would analyse and comment on the financial and non-financial feasibility of the proposed venture into theme park investment, the report would critically evaluate the project using the NPV project evaluation technique and thus recommend that the project is financially sound would prove to a good investment decision on the long run for Wonderland confectionaries.

Table of Contents

1. Introduction to corporate finance ..............................4 1.1 Evolution and importance of Corporate finance....5 1.2 Overview of Wonderland project ..........................8 2. NPV Calculation .......................................................9 3. Project Appraisal .....................................................13 4. Conclusion and Recommendations .........................15 5. References ...............................................................16

1. Introduction to corporate finance

Todays volatile market environment with changing economic and market conditions, have surfaced and highlighted the growing significance of associated risk and the degree of failure that could arise with any undertaken investment. Recently witnessed project failures have all the more highlighted the growing concern about investment decisions, making it all the more critical and crucial for business , as this may often can be the difference between the success or the failure of the business. As reported in numerous literatures just as a good decision could add financial and non financial value to a business, a wrong decision could lead the organisation to financial disasters like bankruptcy or even liquidation. Making the correct investment decision has always been an area of concern for finance professionals, practitioners and investors themselves. It is believed that problems associated with investment decisions is as old as the economy itself, further to this in order to ensure success with optimal utilisation of limited investment resources, it is very vital all decisions make in the course of action should be taken with due consideration and the influence it has from the internal, external environment along with the influence decisions have on the investors. As reflected in the work done by Van Groenendaal and Kleijnen, 2002; Biezma and San Cristobal, 2006 the decisions made in corporate finance are primarily dominated by calculus of Net present Value (NPV), internal rate of return (IRR) or the payback period. Employing these financial calculations would enable the decision maker to assign values to the adopted financial model, thus providing the best possible sensitive analysis of the most likely outcome from the investment. These methods of investment evaluation are conducted with the prime objective of reflecting the possible outcome from the intended investment, adding to the knowledge, understanding of numerous elements involved, realistic timeframes of expected returns etc thus positioning the investor in a strategically and financially sound position so that they could capitalise on the opportunity the investment can possible offer. Other than these methods the more traditional method as mentioned by Pike and Neale, 2000 is the consideration of bringing into account risk management principles, which would best estimate the results from an investment. The undertaken report aims to look into evaluation of the proposed investment venture that Woodland confectionaries, would like to undertake as diversity from its principle operation. Even with the element of entering into a whole new venture is financially sourced; there is a need to ensure that the project that has been undertaken is both financially and non-

financially feasible, and achieving this investment analysis would be the prime objective of this report. By the end of the analysis the report would be reflect and comment on the overall feasibility of the investment project that Woodland confectionaries intends to undertake, the report to conclude would on the basis of the report findings and analysis conclude with recommendations and comments on whether or not the investment is in the best interest of Woodland confectionaries, to best judge the case the report would make required assumptions and analyse the financial and non financial performance of Alice Limited that would possibly be the closest competitor for Woodland confectionaries in their theme park venture.

1.1 Evolution and importance of Corporate finance

Corporate finance over the last few decades has gained a very significant position in todays modern economies, as reported by numerous researchers and academicians there have been great developments in both practice and principles, revolutionising the way business approach and apply corporate and project finance. As mentioned by Liber, 2001 when the history of corporate finance is reviewed, signs of major developments came to surface in the 1970s, and the primary driver for these developments have been sophisticated financial market practice, that starting evolving in a much more risk oriented environment owing to numerous corporate failures and disasters. In the present financial and economical environment one of key players that have surfaced are the stock markets, and with the influx of globalisation and internationalisation, financial markets have got more integrated giving way to numerous investment opportunities all across the globe. With such growing opportunities, investors today are always on a lookout to capitalise on all possible chances to venture into new investments; however they need to ensure that the project undertaken is both financially and non-financially feasible, as an incorrect investment decisions could, not only lead to project failure, but could damage the present health of the business, leading to severe blows to its financial standing and future market position. With the growing significance of the risk analysis and project feasibility leading to successful investment outcomes, project finance has really emerged and developed as an important investment tool, reflecting on critical success and failure factors associated with a project undertaking. As Liber, 2001 further contributes to the literature by mentioning that there are numerous definitions associated and addressing project finance; however the best representation of

proj t i

i t

one gi en by Leslie. E. Sherman Infrastructure and Finance Practice

Group, Thelen. Reid and Priest LLP and i as discussed below: Project finance non-recourse financing of the development and construction of a particular project in which participants looks principally to the revenues expected to be generated by the project for the repayment of some loans and the assets of the projects and in many cases as collateral for loans rather than to the general credit ofthe project sponsor. (By Leslie E. Sherman Infrastructure and Finance Practice Group, Thelen. Reid and Priest LLP http://www.constructionweblinks.com) According to current statistics global project finance recorded the highest half year volume since 2000 with $98.5billion and 210 deals and 1H 2006, compared to $72.3 billion and 248 deals in 1H 2005. This represents a 36% increase from the same period last year and a 41% increase from 1H 2004. (Project Finance Journal September, 2006. pg. 41)

PARTIE TO PROJE T FINAN ING

Source: C ew 2001

As reflected in most corporate and project management journals, most project management projects today are privately funded and can be best characterised by the following three features:

The host government local or central provides concessions to private companies that aid and establish a project as a separate company.

As most of the finance is managed by the project manager or the sponsor of the investment project, therefore a major portion of the equity would be of the project company.

The project company operates on a very high debt to equity ratio, with limited resources from the government or the equity holders in event of a default, the company also enters into a comprehensive contractual agreement drawn between the suppliers and the customers.

(Chew 2001)

Project finance a relative new concept in the field of corporate finance and can be very distinctly differentiated from traditional corporate finance as briefly discussed below:

Project finance can be distinguished from traditional corporate finance functions in terms of the credit evaluation and assessment process when it comes to loans, the present practice now doesnt only consider the capabilities of the company to repay but also look at more technical details like profit scenarios of the undertaken project, steady cash flow projections these elements act like collaterals to the undertaken debt.

Project Finance has a more technical outlook over the traditional approach of financing which considered financing a specific project by either the means of debt and/or equity; this modernized approach uses various technical financial tools and models, which analyses the future and current value of the investment. It evaluates the projects outcome on the bases of the future returns in the form of profit and cash flows.

In the case of traditional corporate finance the guarantee of the debt taken on the entire property of the company responsible for the project, while in the case of project finance

the main guarantee for the project are the assets that are related to the project that is being financed.
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The other significant difference is that in the case of project finance the loan is intended to be repaid by the cash flow generated from the investment itself and also the profit generated from the project, this however is not the case of traditional corporate finance, the project finance has over the years emerged as an alternative to the conventional methods used and is applied on a large scale projects globally.

1.2

verview of Wonderland project

Wonderland Confectionaries Inc successfully owns a chain of restaurants, and currently is looking to diversify is course of business and venture into a new business stream, it intends and proposes to venture into investing in a theme park, which would be an initial investment of 500 million, although the business does not have any prior experience or expertise in this area of business, a thorough research spending an amount of 400,00 was undertaken on theme parks and the management on the basis of this found the investment very attractive, a team of finance professionals within the business were asked to the associated risk and the appropriate financial structure of the closest theme park and on the basis various sources of finance were considered and the possible fianc structure was proposed. However the overall feasibility of the project still remains under question, an in-depth analysis of various financial and non financial issues is now being carried out to comment and recommend on the overall success of the project.

2. NPV Calculation

W NDERLAND CASH OUT FLOW INITIAL INVESTMENT =500M YEAR 0 = -250 YEAR1= -250M RESEARCH MARKETING COST = YEAR 0 -400,000 OPERATION COST = 17M IT WILL INCREASE 0.85M EVERY YEAR WORKING CAPITAL REQUIRED = 60M LABOUR COST =35M INSURANCE COST =2M CALCULATION OR CASH OUT LOW
YEAR0 INVESTMENT MKT.COST -250M 0.4M YEAR1 -250M YEAR2 ____ YEAR3 YEAR4 YEAR5

OPERATING COST

17

17.85

18.7

19.55

20.40

INSURANCE

2.10

2.205

2.315

2.431

2.552

LABOUR COST

35

36.75

38.59

40.52

42.54

44.67

WORKING CAPITAL TOTAL

60

63

66.15

69.46

72.93

76.585

347.4

368.85

127.95

138.295

148.90

159.8

WORKING 1 ADMISION TICKET: AVERAGE TICKET SALES 20,000 PER DAY ADULT: (20,000*30%*25)*365=54.75M CHILDREN: (20,000*70%) (15)(365) =76.65 TOTAL= 54.75+76.65 = 131.4M WORKING 2 Assumption: 10 is spent on food 7 on an average is spent on gifts FOOD &GIFT FOOD: 20,000*(10*40%)*365 =29.2M GIFT = 20,000(7*45%)*365 =22.995M TOTAL = 52.195M CASH INFLOW:
0 TICKET REVENUE(W1) FOOD &GIFT(W2) ADVER.SAVING W.CAPITAL TOTAL 3 3 3 60 63 3 63 0249.595 3 66.15 261.92 3 69.46 274.87 3 72.93 288.46 76.58 76.58 52.195 52.80 57.54 60.42 1 2 131.4 3 137.97 4 144.87 5 152.11 6

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WORKING 3 CAPITAL ALLOWANCE ASSUMPTION = CAPITAL ALLOWANCE WOULD BE CALCULATED FROM FIRST YEAR AFTER INVESTMENT AND WOULD BE CALCULATED ON FULL AMOUNT OF 300M BOOK VALUE YEAR1= 300*25% =75M YEAR2= 225*25% = 56.25M YEAR3=168.75*25%=42.187M YEAR4=126.5625*25%=31.64 YEAR5=94.9218*25%=23.73 BOOK VALUE 300M -75=225 225-56.25=168.75 168.75 -42.185=126.562 126.562 -31.61=94.921 94.921 -23.73=71.19

TAX SAVING ON CAPITAL ALLOWANCE Y1= 75@35% = 26.25 Y2=56.25@35%=19.69 Y3=42.1875@35%=14.765 Y4 = 31.64@35% =11.07 Y5 =23.73.@35% =8.31
Y0 TOTAL INFLOW TOTAL OUTFLOW TAXABLE REVENUE TAXATION@35% 120.54 -223.86 RESIDUAL VALUE 107.05 -198.8 -42.58 79.065 -43.27 80.355 -44.09 81.88 -45.03 83.63 -26.8 49.78 150M 3 -347.4 -344.4 1 63 -368.85 -305.85 2 249.595 -127.95 121.695 3 261.92 -138.295 123.625 4 274.87 -148.90 125.97 5 288.46 -159.8 128.66 76.58 6 76.58

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TAX SAVING PROJEST FLOW DISCOUNT FACTOR (WACC@14%) PV -223.86 1 CASH -223.86

26.25 -172.55

19.69 98.76

14.77 95.13

11.07 92.95

8.31 91.94 199.78

-.8771

0.769

0.675

0.592

.519

0.456

-151.34

75.95

64.21

55.03

74.72

91.1

NPV =-41.19

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3. Project Appraisal

Proj t apprai al can be consi ered as t e anal sis of an invest ent or a project in order to determine its gained merits or advantages along wit its acceptabilit in accordance wit t e previousl established criteria. In project finance project appraisal is one of the final steps before project finance is finalized, this process not onl validates the financial feasibilit in terms of costs being reasonable and sustainable but also looks at aspects like ground/ technical situation and also considers the objectives of the projects, its possibilit achievement and most importantl it being realistic. The various techniques that are used for project appraisal are as follows:

Technical Appraisal:  Are all the pre-requirements that would and are vital for the success for the project considered?  Selection of appropriate location, process and other needs are made and addressed to satisfactorily.

Economic Appraisal:  A critical cost-benefit analysis  Elements of shadow prices and economic benefits and cost discussed  Impact of investment on society and locality  Impact and influence of savings on social and economical environment  Impact on fulfilment of national goals:(1) Self sufficiency (2) Employment and (3) Social order

Ecological Appraisal:

 Impact of project on quality of :- Air, Water, Noise, Vegetation, Human life  Major projects ,such as these, cause environmental damage

of

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 Power plants  Industries like bulk drugs, chemicals and leather processing.  Likely damage & the cost of restoration Financial Appraisal:  Whether the project is financially viable? (1) Servicing debt (2) Meeting return expectations In the case of Wonderland, the following project appraisal is done on the basis of the following real options: Expansion and flexibility to bring changes: If the business decides to undertake a process of expansion during the due course of life of the project, there are possibilities to undertake this expansion; this can be justified in following project appraisal terms: Technical Appraisal: The tem by the time of making expansion decision would have a well equipped technical team, with complete technical and operational expertise. Processes, machines and other requirements like location are already available Economic appraisal: In terms of economic appraisal the project in the next six years would start showing gains, making the capital available for reinvestment, moreover as per the cash flow; the cash inflow forecasted for the business is healthy and is growth with the age of the project. Ecological appraisal: The project is insured for an amount of 3 million and would be able to sustain any repairs, replacements etc. The project does not have environmental hazards and would comply by the required code of conduct. Financial appraisal: The project is financial sound and would be able to meet all its liabilities without any problems, working capital from year one shows an upward movement.

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4. Conclusion and Recommendations

The above calculations and analysis are reflective of the financial feasibility of the investment, as per the value reflected by the NPV and the inflow and outflow of cash from the investment, it is evident that although the returns would be slow but the overall project is self sustainable and is recommended as an investment. 150 Million in the 6 th year as residual income is very promising for the project, which is backed by a health cash flow which matures with the age of the investment, a good flow of inflow and outflow of capital is reflective of good working capital management practices. Thus to conclude, the report strong recommends the investment on the basis of the fact that the overall feasibility of the investment looks healthy the project is recommended to be undertaken, after considering other non financial issues in regards to gaining trained and expert experienced staff during project initiation and other environmental and social issues that would need to be addressed.

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5. References
Chew D the New Corporate Finance: Where Theory Meets Practice. 3rd Edition 2001.Pg. 367
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Biezma, M.V. and San Cristobal, J.R. (2006) Investment criteria for the selection of cogeneration plants a state of the art review, Applied Thermal Engineering, Vol. 26, No. 56, pp.583588 Van Groenendaal, W. and Kleijnen, J. (2002) Deterministic versus stochastic sensitivity analysis in investment problems: an environmental case study, European Journal of Operational Research, Vol. 141, No. 1, pp.820

Pike, R. (1986) Investment Decisions and Financial Strategy, Humanities Press, Oxford, USA

Pike, R. and Neale, B. (1993) Corporate Finance and Investment Decisions and Strategies, Prentice-Hall, London, UK

Ponis, S., Tatsiopoulos, I., Vagenas, G. and Koronis, E. (2006) A proposed ontology to support knowledge logistics in virtual organisations: a case study from the pharmaceutical industry, Proceedings of EUROMA 2006, Moving up the Value Chain, Glasgow, UK, pp.5058

Donald H. Chew, The New Corporate Finance: Where Theory Meets Practice, 2001Hamberg, M. Strategic Financial Decisions. Malmo, Liber, 2001

Leslie. E. Sherman Infrastructure and Finance Practice Group, Thelen. Reid and Priest LLP

Stephen A Ross, Randolph W Westerfield, Jeffery F. Jaffe, and Bradford D. Jordan International Student Edition (2007) Core Principles & Applications of Corporate Finance McGraw-Hill Irwin, New York, NY

Aaker J and Shumaker J (1994).... Looking back and looking Forward....., a participatory approach to evaluation, Little Rock, Arkansas: Heifer Project International

Barrow C J (1997) Environmental and Social Impact Assessment, An introduction, London: Arnold Beck T and Stelcner M (1997) Guide to Gender-Sensitive Indicators, Quebec: Canadian International Development Agency

Blackburn J and Holland J (Eds) (1998) Who Changes? Institutionalizing participation in development, London: Intermediate Technology Publications

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Davies. A (1997) Managing for Change, How to run community development projects, London: Intermediate Technology Publications in association with Voluntary Service Overseas

Davis J, Garvey G with Wood M (1993) Developing and Managing Community Water Supplies, Oxfam Development Guidelines No 8, Oxford: Oxfam (UK and Ireland)

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