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Unit 03 Global Finance and Strategy - Othm Level 7 Diploma In Accounting And Finance

The case study below illustrates how Syngenta, a company created from the fusion of two agronomical divisions of two conglomerates, plans its investments with the help of analytical tools such as the Average Rate of Return (ARR) and the Payback Period.

Case study

Formed in 2000 by the merger of the agronomical divisions of Zeneca and Novartis, Syngenta is one of the world's leading suppliers of seeds and crop protection systems. A multinational company, Syngenta employs 26,000 people across 90 countries. In 2010, its sales exceeded $11 billion. Syngenta's mission is ‘bringing plant potential to life'. It uses the latest science and technology to develop products that help its customers improve crop productivity. Syngenta's products are used by farmers to protect crops against weeds, pests and fungal diseases. The company's herbicides, pesticides and fungicides are usually based on complex chemicals. To develop products that can improve farm output without damaging the natural environment requires intensive Research and Development (R&D). To protect its investment, Syngenta obtains patents for its new products.

In 2008, Syngenta was faced with a major investment decision. As the Amistar range of fungicides moved through its product life cycle, its 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 had to decide whether increasing production would be financially viable and a worthwhile investment.

Part A

The table below shows estimated cash flow for the Grangemouth expansion project.

Cash flows (£'s million)
Year	0	1	2	3	4	5	6	7	8	9
Cash Inflow
Sales		200	400	400	400	400	400	400	400	400
Total Inflow		200	400	400	400	400	400	400	400	400
Cash Outflow
Investment	150
Manufacturing Costs		80	160	160	160	160	160	160	160	160
Sales and Marketing		15	30	30	30	30	30	30	30	30
Other Costs		25	25
Total Outflow	150	120	215	190	190	190	190	190	190	190
Net cash flow	-150	80	185	210	210	210	210	210	210	210

Required:
1. Assess the investment opportunity using payback period and accounting rate of return. Review the advantages and disadvantage of each method. (LO 6)
2. Assess the sources of finance, the Syngenta Company, could have used and evaluate the risks involved on the identified sources. (LO 6)
3. Explain techniques used to mitigate and manage the global risk involved. (LO 6)
4. Discuss the potential financial decisions that can be taken for the investments. (LO 7)
5. Review investment decisions and the strategies applied in the global environment. (LO 4 and LO 7)
6. Use strategic implementation techniques to comment on the decisions made. (LO 3 and LO 7)