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Problem - 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.
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.
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