Question

Cocoa Life Ltd is considering expanding its current cocoa plantation portfolio. The company is currently looking at two countries – The Ivory Coast and Ghana. The company's plan to issue bonds and new ordinary shares to raise money for the investment. This gives rise to a 12% weighted average cost of capital.  

The following data are estimates for the project in these countries.

	Ghana	The Ivory Coast
Initial investment ($’000,000)	600	400
Land lease (years)	15	20
Payback period (years)	7	11
IRR (%)	12.50%	16.25%

The Ivory Coast is the world’s largest cocoa producer. Major companies such as Nestle source its cocoa from this country. However, reports on unfavourable working conditions including child labour raises some concerns (see Nestle, n.d.).

Cocoa plantation in Ghana contributes to 15% to the nation’s GDP. Ghana is the second largest cocoa producer in the world after The Ivory Coast. Ghanaian cocoa is known for its high quality (Cadbury, n.d.), thus attracting major chocolate producers. However, between 2014 to 2018 cocoa farmers in the country were reported to smuggle the cocoa beans to and from neighbouring countries including The Ivory Coast, depending on the prices in those countries.

Required

Evaluate the proposals. Your answer should include the financial and non-financial factors.

Answer 1

Financial Factor:

1. Investment in Ghana required high initial investment as compared to The ivory coast country.

2. Inspite of lower payback period in Ghana but Land Lease Life is shorter in Ghana for generating the revenue from business as compared the ivory cost courty which lead lower IRR in Ghana.

3. The cost of Capital is 12% but IRR from Ghana is 12.5% which means income from the project is (12.5%-12.0%)= 0.5% only but Ivoory coast country. IRR is 16.25% which means income from the project is (16.25%-12.0%)= 4.25%. So Return from investment is higher in Ivoory coast country by (4.25%-0.50%)= 3.75%

Non Finance Factor:

1. Smuggling of cocoa beans by the farmer is common by the farmer for gainning from the price difference of cocoa beans in the country so we need to controll this issue.

2.  Ivoory coast country is the second largest production in the world.

3. In Ivoory coast country we need to manage the labour if child labour is not allowed than company need to prepare plan for supplying the labour to work in that situation.

4. Quality of Ghana cocoa beans is good but other good brand company also doing the cocoa beans plantation in Ivoory coast country.

In the view of considering all the piont company can invest in Ivoory coast country.