CASE: CONSORTIUM MC AGUIRRE – SAN JACINTO RAIL (19)

The McAguirre Consortium owns 100% of the shares of San Jacinto Rail. This company was created with the purpose of offering a service alternative to land transport truck at a more competitive price. The significant growth experienced nationally and globally in this sector has led this group of investors to assess the possibility of implementing a new rail route.

The new business detected by the company is to implement a new route between the port of San Jacinto and the port of Ilo, since there is a high transfer of goods between two points, a service that currently is covered only by trucks.

In the beginning, the company acquired land in US $ 250 thousand for the construction of its administrative facilities. Regarding stations and railways, the company established a lease with the state railway company for US $ 24 thousand per month. Five oil to operate locomotives made in France at a total cost of US $ 40 000, and 25 cargo trucks at a cost of US $ 8,000 each were acquired. Costs for administration totaled $ 15 thousand a year and maintenance and repair costs to US $ 20 thousand per year.

Market research indicated that currently 10 thousand tons of cargo between the two destinations, volume is expected to experience significant growth in the coming years are transferred. In this sense, it is projected that with free trade agreements such as Mercosur. NAFTA, EEC, etc., demand for transportation increased by 10%, an effect that will be reflected in four years.

According to the results of surveys conducted during the first year of operation, the company could capture 35% of the total cargo market between the two points. However, the lower prices charged by San Jacinto Rail suggest that the market share increase by 5% a year to complete 50% of the total market. The pair price tonne transported between two points is US $ 300, value will be maintained in real terms adjusted solely by changes in inflation, estimated at 5% annually.

The technical study noted that to carry out the project must incur the following additional investments:

To efficiently meet demand in the fourth year, the company will acquire four additional wagons. This operation will be financed 100% from its own resources. Currently there is no rail between the two points. This section has a distance of 80 kilometers, approximately, and its construction is estimated to take six months. The construction costs will be distributed evenly throughout the duration of the execution of the work.

Operating costs per transported tonne are presented in the following table:

It means cash payment of labor to the disbursement that the enterprise is the 30th of each month. EI credit for 30 days oil consumption shall take effect once the vendor invoice issued by the end of the month and receive the cash payment on the first day of the following month.

This new business unit will increase by 40% the costs for management and 30% expenses for maintenance and repair; both are disbursed on the 30th of each month. To publicize the service, the company implemented an advertising campaign a month before the launch at a cost of US $ 20,000. The advertising company responsible for the campaign agreed to receive payment at the end of it. To maintain and remember the service has been estimated advertising expenditure for US $ 1.800 monthly.

Once issued the bill later this month, customers canceled 30% cash and 70% with 60 days credit. Payments will be effective the first day of the following month. To finance the purchase of machinery and the first cars, the company will request a credit for which is considering the following financing alternatives:

Alternative I

Order a loan of US $ 120 thousand to be paid in four equal installments of capital amortizaci6n an interest rate of 13% annually.

Alternative 2

Apply the same credit with one year grace of principal and interest, canceling three equal installments of principal and interest at 12% per annum.

The consulting firm that conducted the study of economic feasibility of the project took US $ 5,000. If the rate of income tax is 15% and the cost of equity capital is 14%,

It asks:

What is the most convenient alternative funding? What is the NPV of the project, using the scrap value of the project by the method of market values? What is the NPV of the company, consider the tax effect of financing (NPV adjusted)? What method considers that it would be appropriate to evaluate the project?

Note: All assets of the company have the same accounting treatment: 20% annually. I evaluated the project considering a horizon of five years.

Solution in English: excel