Investment appraisal in action
A Syngenta case study

Page 1: Introduction

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Food is one of the essentials for life. Farming is therefore an industry on which everyone depends. Globally, the farming industry already faces a great challenge to produce food for the seven billion people now living on this planet. By 2050 the global population will be over nine billion. To feed this population, the United Nations estimates that food production will need to increase by...
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Page 2: Reasons for investment

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Adding value Business is about transforming inputs such as raw materials and labour into outputs. By adding value at each stage of the production process, a company hopes to generate a profit. This is when the revenue from the sale of the outputs exceeds the cost of the inputs. Profits are used to reward shareholders and can be reinvested in the business. Syngenta adds value to its basic...
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Page 3: Investment appraisal

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In 2008 Syngenta was faced with a major investment decision. As the Amistar range moved through its product life cycle, maximum capacity was approached. Syngenta could not produce more Amistar without investing in its production facilities. A proposal was put forward to expand production through a £150 million investment at the Grangemouth site in Scotland. The company needed to decide...
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Page 4: Projected cash flows

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An investment – or capital expenditure – involves a cash outflow in the present that is expected to yield greater cash inflow to the future. To do this, managers need to produce the best available financial estimates of the cash inflows and outflows that would result from the investment. Payback Table 1 shows estimated cash flow for the Grangemouth expansion project. The simplest...
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Page 5: Discounted cash flows

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This problem is tackled using discounted cash flows. This is a method of determining what future cash inflows are actually worth today. This depends on the opportunity cost of money. One way of putting a value on the opportunity cost of money is to use interest rates. This is what could be earned by simply keeping the money in a bank account gaining interest. Suppose interest rates for the...
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Page 6: Conclusion

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On the basis of the investment appraisal, the Grangemouth expansion project was approved. The analysis suggested that it will earn well above the cost of capital and it will reach payback after less than two years. The new plant came on stream in 2010. It created 50 new jobs and Syngenta is now supplying Amistar to new customers in expanding markets.
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