Waha greenhouse: project evaluation and funding

The engagement

Waha Agritech Co. (a fictional Saudi food producer; figures in SAR millions unless stated) imports and trades fresh produce. Its board is considering a hydroponic greenhouse that would grow 12 thousand tonnes a year of its own produce for 8 years, and has asked you for an investment paper: should Waha build it, and how should it fund the SAR 235.84m year-0 outlay?

Your model must answer both questions. The board will not accept a headline NPV on its own: it wants to see a hurdle rate that reflects the risk of greenhouse farming, how far volume could fall before the project destroys value, and what each funding option does to Waha's earnings per share and its loan covenant.

All assumptions are on the Inputs tab. Some items listed there may not belong in the appraisal: deciding what is incremental is part of the work. The three peer companies on the Cost of capital tab are fictional too.

Deliverables

Complete every white cell with a formula linked to Inputs or to other tabs — no typed numbers. The model will be re-tested with different assumptions.

Conventions (follow exactly)

• Timing: today is the start of year 1; year 0 cash flows are undiscounted and every later flow arrives at the end of its year (row 2 holds t). Discount at the project WACC: PV = FCF ÷ (1 + WACC)^t.
• Incremental cash flows only. Include the contribution Waha loses on its imported-produce trading and the land lease income it gives up (both a fixed amount a year, not inflated). Exclude sunk costs, allocated overheads that do not change Waha's total overhead, and all financing costs (interest is charged through the discount rate).
• Revenue = price × annual volume; variable costs = variable cost per tonne × volume. Price, variable cost per tonne and fixed cash costs are given in rows 3–5, inflating from year 2. Volume is level. (Price in SAR thousand per tonne × thousand tonnes = SAR m.)
• Depreciation: straight-line to a zero book value over the life (negative on row 11). Tax = −EBIT × tax rate; a project loss reduces tax on Waha's other profits (tax can be positive). Operating cash flow = EBIT + tax − depreciation (i.e. NOPAT plus depreciation added back).
• Working capital is held ahead of sales: the balance at the end of year t = working-capital % × revenue of year t + 1, so it is invested from year 0 and is zero at the end of year 8. Its cash effect = −(this year's balance − last year's), with year 0 = −balance.
• Resale: the greenhouse is sold at the end of year 8 for the resale value; book value is zero, so after-tax resale = resale × (1 − tax rate). Capex is negative in year 0.
• Cost of capital: asset beta = equity beta ÷ [1 + (1 − t) × D/E] (Hamada, debt beta zero, the Inputs tax rate for all companies); average the three asset betas; relever at the target D/E: βL = βU × [1 + (1 − t) × D/E]. Cost of equity = risk-free + βL × equity risk premium. Pre-tax cost of debt = the yield to maturity of Waha's bond: RATE(years, coupon × 100, −price, 100) (annual coupons). Debt weight = D/E ÷ (1 + D/E). WACC = (1 − debt weight) × cost of equity + debt weight × cost of debt × (1 − t).
• NPV = year-0 FCF + NPV(WACC, years 1–8). IRR on years 0–8. PI = PV of years 1–8 ÷ the year-0 outlay. Discounted payback interpolates within the year the cumulative PV turns non-negative: with k = COUNTIF(cumulative PV, "<0"), payback = (k − 1) + the last negative cumulative PV (made positive) ÷ the next year's PV.
• Volume break-even: every volume-driven cash flow (contribution and working capital) is proportional to volume, so NPV changes by a fixed amount per extra thousand tonnes a year. Row 21 = working-capital % × next year's price (zero at the end of year 8); row 22 = (price − variable cost) × (1 − t) − the change in row 21 (year 0 = −row 21). NPV per extra thousand tonnes = NPV of row 22 at the WACC (year 0 undiscounted). Break-even volume = volume − NPV ÷ NPV per thousand tonnes; margin of safety = 1 − break-even ÷ volume.
• Financing (year 1): funding required = the year-0 outlay (capex + working capital). Year-1 EBIT including the project = Waha's EBIT before the project + the project's year-1 EBIT. Debt plan: borrow the full amount at the pre-tax cost of debt (the bond yield), repaid in full at the end of year 8; interest = existing debt × its rate + new loan × the bond yield; shares unchanged. Equity plan: new shares = funding ÷ issue price; interest on existing debt only. EPS = (EBIT − interest) × (1 − t) ÷ shares; interest cover = EBIT ÷ interest. EPS-indifference EBIT = (I_debt × N_equity − I_equity × N_debt) ÷ (N_equity − N_debt). Tax-shield PV = PV(bond yield, life, −t × bond yield × loan). Covenant headroom = 1 − covenant × debt-plan interest ÷ year-1 EBIT.
• Decisions: "Accept" if NPV > 0, otherwise "Reject". Funding: "Debt" if the debt plan's interest cover is at least the covenant and its EPS is higher than the equity plan's, otherwise "Equity".
• No rounding. Results are graded to within 0.05%.