Question

currently looking at two countries - Sri Lanka and Malaysia. The company's plan to issue bonds and new ordinary shares to raise money for the investment. This gives rise to a 15% weighted average cost of capital.

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

A preliminary study by the company's investment team indicates that tea contributes significantly to Sri Lankan's economy, primarily in the country's export and employment. Approximately, 5% of Sri Lankans work at tea plantation (BBC, 2018). However, reports on unfavorable working conditions and recent development in the country raises security concerns.

Tea plantation is only a small portion of agriculture industry in Malaysia. Hence, there are not as many Malaysians are employed by this industry relative to its populations and the Sri Lanka. The investment team at Tea Life also finds that that Malaysia introduced minimum wage in 2016 and was revised in 2019 from approx. A$300 to A$400 per month.

Required

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

a contributes significantly to Sri Lankan's economy, primarily in the country's export and employment. Approximately, 5% of Sri Lankans work at tea plantation (BBC, 2018). However, reports on unfavorable working conditions and recent development in the country raises security concerns.

Tea plantation is only a small portion of agriculture industry in Malaysia. Hence, there are not as many Malaysians are employed by this industry relative to its populations and the Sri Lanka. The investment team at Tea Life also finds that that Malaysia introduced minimum wage in 2016 and was revised in 2019 from approx. A$300 to A$400 per month.

Required

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

Sri Lanka

Malaysia

Initial investment ($’000,000)

250

500

Land lease (years)

10

15

Payback period (years)

7

11

IRR (%)

15%

16.25%

Answer 1

	Sri Lanka	Malaysia
Initial investment ($’000,000)	250	500
Land lease (years)	10	15
Payback period (years)	7	11
IRR%	15%	16.25%
WACC	15%	15%

Evaluation of the two proposals:

Financial factors

$ amt. of Investment is high for Malaysia

In case of SriLanka , the initial investment is recovered by 7 years ,but the same takes 10 yrs. For Malaysia. Both pays back within the lease period

Malaysian proposal scores over SriLanka's as its IRR 16.25% >WACC 15%

Non-financial factors :

SriLanka's economy & its people thrive on tea plantation-business ,

so may be a good option where quality tea-leaves as well as both quality and cheap labor availability is possible.

But the country's political climate will be the major deciding factor , with too much of internal strifes, which will categorise this as a high-risk investment.

For that , there is not much of an incentive in the form of IRR ,

but for the fact that the initial investment is half of that required for Malaysia.

But as far as Malaysia is concerned, adequate quantum of physical labor will not be available, as here, the tea does not form much part of the whole agricultural produce.

As a result, quality will also be less than that of SriLanka and the wages also high, in the event of the Malaysian government having raised the minimum wages.

But the wage part might be taken care of by the increased IRR

provided Tea Life is prepared to spend twice the amount of initially , with respect to this investment.

Taking into consideration , all the above financial & non-financial factors

Malaysia seems to be of low-risk category , fetching a better IRR , not only when compared to that of SriLanka but also the WACC of 15%