Background Information
Sweet Farmers is a sugar cane farm operating in North Queensland. The sugar cane harvester that is currently in use needs to be replaced before the next harvest as it has reached the end of its useful life. The farm’s management is evaluating two different types of harvesters, namely a 2-Row Soldier Harvester and a Combine Harvester, both very popular in the industry.
Management believes the 2-Row Soldier Harvester should be purchased due to the fact that, despite the higher capital expenditure, it has a longer useful life, can harvest more sugar cane per hour and has lower running costs compared to the Combine Harvester.
The president of the company, Mr Candy, is not satisfied with management’s recommendation as no appropriate analysis has been conducted in support of this advice. Mr Candy is also aware that advances in the harvesting technology occur frequently and therefore will most likely look at new models when the recommended model reaches the end of its useful life.
The company has provided detailed information related to the two harvesting machine options in the ‘Harvesters Information’ spreadsheet.
Task
Mr Candy has requested that you provide a detailed financial analysis of the costs of each harvester option and prepare a report that recommends a preferred option. As both harvesters will harvest the same total amount of sugar cane each year, and therefore generate the same revenues, revenue is ignored in this analysis.
The following requests have been made about the analysis and report:
- The financial analysis is to be completed in Excel. The file is to be easily adjustable for different scenarios and all inputs must be in the one sheet called ‘Assumptions’ with the analysis of each harvester type conducted on a separate sheet.
- The report is to be short (600 words + 20% tolerance) and written in a manner that can be understood by a person with a basic understanding of financial analytical tools.
- The report sections must be: Summary, Methodology, Recommendations and Limitations.
o Summary: outlines the task and advises of the recommendation.
o Methodology: must explain and justify the methodology employed.
o Recommendations: recommends a preferred option. In addition, you are required to include an analysis on the sensitivity of the decision to the discount rate (could your recommendation change if the discount rate changes?).
o Limitations: must identify key limitations with the analysi
Sample Solution