25742 Financial Management Case Study
Holdings. They have spent the past few months reviewing the feasibility of starting an
aquaculture farm. James and Gregory have assembled a large amount of data that may be
useful for the analysis. Much of the data was obtained from the Australian Bureau of
Agricultural and Resource Economics (ABARE). The brothers have also made several visits to
Canberra and to aquaculture farms throughout Australia and the United States. In reviewing
their expenses to date, they have determined that $183,533 has been spent on research
into aquaculture since they began investigating the venture. They believe this money has
been well spent because they now have a much better idea of the viability of an aquaculture
The brothers’ grandfather, Leo, purchased some land many years ago, which included a
small farm at Pambula River. This is an ideal site to locate the proposed aquaculture farm.
Leo only paid a few hundred pounds for the farm, but it was recently valued at $650,000 by
GBF’s bank, due to its riverside location. James and Gregory think it is a good idea to use this
land because it has not been used for several years. Leo stipulated that as long as the site
remained farmland, the old Massey Ferguson front-end tractor loader he bought to plough
the fields could not be sold. Because they plan to convert the use of the land, the brothers
believe they can then sell the tractor for $45,000.
Based on their investigations, the brothers believe they should cultivate finfish. For risk
management purposes, they propose to diversify their fish stock between two varieties—
silver perch and eels. These two types of finfish are in high demand and a Coles buying
agent is prepared to sign a long-term supply contract for silver perch and eels at the 2016-
17 prices recorded by ABARE (see the appendices).
The advice received from ABARE indicates that a silver perch farm with an output of 180
tonnes a year would require 25 hectares of land, incorporating 10 hectares of grow-out
ponds. An eel farm would require 12 hectares of land, incorporating 5 hectares of grow-out
ponds, to produce 90 tonnes per annum. The Pambula River farm has the required space to
farm silver perch and eels on that scale.
The silver perch and eel ponds will cost $775,000 and $470,000 respectively. The existing
farm buildings, which are fully depreciated and have no commercial value, could be used to
house juvenile breeding tanks costing $377,000. Following advice from ABARE, GBF has
decided to evaluate the viability of an aquaculture farm as a fifteen-year venture.
GBF intends to borrow $1,622,000 from Westpac to cover the capital costs of acquiring the
aquaculture farm assets. The loan will be an interest-only fully secured business loan
because GBF will offer the pub it owns as security.
If GBF proceeds with the aquaculture venture, ABARE will provide training and business
management advice, as well as financial support and advice on how to access new markets.
However, due to recent problems at a new aquaculture farm in Queensland, ABARE has
advised GBF that it will have to obtain an environmental impact statement (EIS) before
commencing operations. GBF has obtained an $83,000 quote for an EIS from an approved
The brothers have been warned that aquaculture farms experience large variations in sales,
especially in the start-up phase. The inability to pass on losses and the cash drain of buying
juvenile fish has prevented many investors from entering the industry. Apart from the
normal risks faced by farmers, the aquaculture industry has an extra dimension of
uncertainty associated with climate and other environmental factors. Water temperature
and disease are major factors beyond the control of farmers. The brothers have been
warned that due to this risk they should expect to produce only half of their expected full
volumes in some years. ABARE advises prospective aquaculture farmers to allow for periods
of diminished production in their business cases.
The brothers are aware that they will not be able to harvest any fish until the fourth year of
operation, since the initial batch of juvenile fish will need three years to grow to a
reasonable size. This is the reason for the large number of grow-out ponds. Construction of
the grow-out ponds will take one year, so the first batch of juvenile fish will only be
purchased at the end of the first year. GBF intends to purchase $75,000 of juvenile silver
perch and $25,000 of juvenile eels at that time. It will purchase the same amounts of these
fish at the end of each year until year 12, with the fish purchased in that year being mature
enough to harvest in year 15.
Although the Pambula River farm is currently not used for any commercial purpose, GBF
spends $38,000 in maintenance and weed control each year. With the introduction of an
aquaculture farm, that cost will increase to $67,000, starting in the first year of operation.
The supply contract with Coles stipulates that the fish must be in peak condition. GBF will
therefore have to spend $33,700 per year on aquaculture veterinarian fees for disease
treatment and prevention to ensure that its fish meet strict quality control standards. These
fees will commence in the first year. In addition, starting in the second year, the power to
run the aerators for the ponds will contribute an additional running cost of $48,200 per
The following table provides the schedule of expected finfish harvests (in tonnes) from the
aquaculture farm. The projections include some variability to account for climate and
Year Silver Perch
1 to 3 0 0
4 to 6 180 90
7 90 45
8 to 9 180 90
10 90 45
11-13 180 90
14 90 45
15 180 90
The brothers are concerned about wage costs. Their accountant has indicated that
Gregory’s current annual salary of $250,000, which will not change, should be included in
the costs of the aquaculture farm because he will be the manager. In year 2, as the business
expands, James will become a full-time joint manager with Gregory, with the same salary he
has now. Harry and Charles will continue to run the existing businesses, with no change in
their annual salaries. Casual labourers will be hired to harvest the fish for the duration of the
project. They will start working in the fourth year and will cost the business $100,000 per
year, from then on.
Harry is concerned about the losses incurred in first few years of operation. ABARE has
advised GBF that the Government is keen to promote aquaculture as a sustainable
alternative to ocean fishing, which is leading to a decline in ocean fish stocks. The tax laws
for aquaculture farms allow them to claim the purchase of juvenile fish as a tax-deductible
cost at the time of payment. The Australian Tax Office (ATO) has ruled that the grow-out
ponds are classified as “fish farming ponds (earth and clay)” with an economic life of 20
years. Gregory and James feel that the large capital costs of constructing the grow-out
ponds should be amortised over the 15-year period. The juvenile breeding tanks can be
depreciated for tax purposes at 10% per annum, straight-line.
Four years ago, GBF spent $47,000 to decontaminate the river because pollutants from an
upstream factory were affecting the farmland. The river is now totally clean, and the water
is suitable for use in the grow-out ponds. Charles recommends that the decontamination
cost should be treated as an opportunity cost for the aquaculture project.
1) The farm is not expected to increase in value over the life of the aquaculture venture.
2) Inflation is practically zero and can be ignored.
3) GBF is an ongoing profitable company and pays tax at 30%. The ATO will allow any losses
from the aquaculture farm to be offset against the company’s existing operations.
4) Since Leo bought the farm prior to the existence of capital gains tax, all profits on land
sales are not subject to taxation.
5) The Massey Ferguson front-end tractor loader was bought in 1943 and was depreciated
over its 10-year life.
6) You may assume that the EIS can be obtained today and that it is an allowable tax
7) GBF’s existing business produces annual cash sales of $1,677,000. This figure will not
change with the introduction of an aquaculture farm.
8) The required rate of return for the aquaculture farm is 25%.
9) When the aquaculture farm is decommissioned in 15 years’ time, it will be possible to
sell the juvenile breeding tanks to an aquarium for $18,000.
10) The loan used to finance the capital costs of the aquaculture farm will charge a fixed
interest rate of 3% p.a., resulting in annual interest payments of $48,660.
11) Since the grow-out ponds are essentially just large holes in the ground filled with water,
they will have a salvage value of zero when the aquaculture farm is decommissioned.
12) The brothers’ salary costs will stay the same, regardless of whether they decide to
proceed with the aquaculture farm.
You are required to produce a detailed annotated spreadsheet containing all your
calculations, as well as an executive summary outlining your assumptions and findings. The
executive summary should fit onto a single A4 page. It should include useful supplementary
information that will help GBF make its decision, as well as the outcome of a sensitivity
analysis exposing some of the key risks. In particular, you should analyse the sensitivity of
the NPV to variations in production.
TABLE S7 Fisheries and aquaculture production, New South Wales
t $’000 t $’000 t $’000
Rock lobster 154 11,430 158 11,785 156 11,275
King prawn 619 12,612 525 10,173 767 15,682
School prawn 702 6,890 692 6,740 483 4,727
Other prawn a 23.4 308 31.0 381 76.4 517
Crab 532 8,033 532 9,514 462 9,095
Other b 130 1,262 114 1,522 139 1,615
Total c 2,159 40,536 2,052 40,115 2,083 42,911
Blacklip abalone 124 3,515 128 3,582 128 3,663
Cuttlefish 78.0 362 64.0 343 73.8 393
Pipi 121 1,208 168 1,943 175 1,962
Octopus 211 1,329 145 1,100 195 1,444
Squid 39.6 601 45.0 772 37.4 597
Other d 8.7 82.2 13.0 90.0 21.2 134
Total c 582 7,097 563 7,830 630 8,193
Sea mullet 2,841 8,941 2,843 9,552 2,281 8,116
Silver trevally 84.7 453 89.0 473 59.8 384
Yellowtail kingfish 118 1,109 100 947 65.7 669
Jack mackerel 0.3 0.3 0 1.0 0 0
Black bream and yellowfin bream 328 3,617 282 3,565 212 2,674
Eastern Australian salmon 765 1,201 836 1,302 754 1,980
Snapper 166 1,737 175 2,003 167 1,860
Grey morwong 21.2 93.4 21.0 106 23.6 108
Mulloway 76.1 708 76.0 818 71.8 766
Sand whiting 120 1,681 99.0 1,514 83.5 1,246
Luderick 389 666 291 707 197 489
Eastern school whiting 785 2,667 869 2,828 953 2,754
Dusky flathead 139 1,321 143 1,353 136 1,240
Other e 3,367 17,094 3,178 17,383 2,767 15,350
Total c 9,201 41,290 9,002 42,552 7,771 37,636
Other nei f 82.1 561 125 585 89.9 565
Total wild-caught 12,024 89,484 11,742 91,082 10,574 89,305
Prawns 331 5,110 326 5,985 360 7,869
Yabby 14.6 338 7.5 336 6.3 380
Oyster 3,713 38,908 3,727 42,774 3,767 45,413
Silver perch 246 3,010 254 2,968 194 2,398
Trout 277 2,838 196 2,290 211 2,623
Barramundi 61.9 941 67.8 982 43.7 654
Ornamental fish na 437 na 474 na 263
Other h 259 4,165 205 4,424 266 5,011
Total 4,904 55,756 4,784 60,232 4,848 64,610
Total production c 16,927 145,240 16,526 151,314 15,422 153,915
a Mainly includes tiger prawn, royal red prawn and greasyback prawn. b Mainly includes Balmain bug, yabby and nippers. c Excludes catches in the
Commonwealth and other jurisdiction fisheries landed into New South Wales. d Mainly includes cockle, periwinkle, whelk and blue mussel. e Mainly
includes Australian sardine, blue mackerel, leatherjacket, flathead, bonito, yellowtail scad, sandy sprat, tailor, silver biddy and eel. f Mainly includes
beachworms and sea urchin. g Excludes hatchery production. h Mainly includes longfin eel, golden perch, Murray cod, mulloway and pearl oyster.
p Preliminary. na Not available. nei Not elsewhere included.
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