Oceanwealth Fish Farming Expansion Case Study

Oceanwealth Fish Farming Expansion

Oceanwealth Aquaculture, Inc. is a leading fresh and frozen fish producer founded in 1945. Recently, as consumers have become more health conscious, the food market has shifted away from red meat and more toward seafood. This has caused Oceanwealth to consider expanding production to include fish farming in warm waters off the coast of Hawaii. The company has two alternative means of beginning the expansion project. The first is with a large plant that would have a capacity capable of meeting high demand while operating at lower costs. The second option would be with a small plant with less sophisticated production and a smaller production capacity, but could be expanded further after three years. Oceanwealth has done research to estimate cash flows and potential market situations to assist in the evaluation of both project proposals.

In this report, we will be projecting cash flows for the large plant, small plant, and small plant with expansion in order to analyze which proposal would be the best course of action for Oceanwealth. The analysis will be conducted with information provided by Oceanwealth and will take into account market conditions such as demand and growth of sales. Probability estimates for these market conditions will then be used to calculate a weighted average of net present value (NPV) for each proposal. This expected NPV would be indicative of which proposal will provide more value for Oceanwealth.

There are several assumptions that were taken into consideration when calculating NPV for both proposals. First, that the information and estimates provided to us by Oceanwealth were accurate. This information includes, but may not be limited to, initial demand, sales growth rate, probabilities of market conditions, costs, appreciation and inflation rates, production capacity, and launch price. Other major assumptions include that the projects will have constant sales growth, be capable of producing at...