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The Times 100

Business Case Studies

Edition 16
Investment appraisal in action

Introduction to Syngenta

One of worlds leading

agrichemical companies
A multinational research
and development

Employs 26,000 people

across 90 countries
Annual sales exceed $11

Uses science and

technology to improve
crop productivity

Products combat pests and

increase yield

Helps meet challenges of

farming industry

World population increasing

Land available for
agriculture reducing
Food production estimated
to need to grow by 70% by

Investment appraisal

Investment may be for

Renewal of worn out assets

Acquisition of assets to expand
Innovation to reduce costs or create new value

Aims to secure competitive advantage

Need to ensure capital costs yield good
return on investment (ROI)
Investment appraisal considers financial
implications of the cost over time

Reasons for investment

Demand for world-leading fungicide Amistar

outstripping production capacity
Syngenta needed to invest to expand
production to retain business
Proposed 150 million investment to extend
production facility

Reasons for investment

Reasons against:

Amistar already in mature

phase of life cycle
potential for competition
Patent protection about to
end cheaper products will
hit market
Global recession means
economy unstable

Reasons for:

Demand for Amistar

increasing in developing
Product has broad usage
Active ingredient used in
other compounds so
potential for new products
Grangemouth had expertise
and resources
Global demand for food likely
to be increased

Projected cash flows

Different methods estimate if investment will

generate ROI

Not all methods give accurate view of profitability

over time
Estimated cash flows for Grangemouth as follows:

Projected cash flows (cont)

Payback/break even the time it takes for

earnings from investment to recover costs

Easy to calculate but does note consider cash

flows after payback or overall profitability

Using Table 1, break even occurs in year 2

At the point when 70m earned (to add to 80m

from year 1)
Payback calculation as follows:

Projected cash flows (cont)

Average rate of return


Aggregates all cash in and

out over life of project
expressed as percentage
Useful to compare ARR
against opportunity cost
(e.g. keeping money in bank
to gain interest)
Does not account for timing
of cash flows

e.g. returns received sooner

are less risky and can be
reinvested so worth more

ARR calculation:

Uses total inflows and


Net cash flow divided by

project life = ARR

Expressed as %

Discounted cash flow (DCF)

Assesses what future

cash inflows are worth
today (Present Value)

Compares projected
value against potential
growth from interest rates
Can aggregate projected
cash flows to give Net
Present Value (NPV) for
whole project

DCF calculation:

E.g. using interest rate at

10%, investing 1 today =
1.10 in a years time

1 in one years time = 0.91


1 in 2 years time =

0.91/0.83 = discount factors

Discounted cash flow (cont)

Syngenta might expect to use discount factor to reflect

minimum expected returns (e.g. 20% - see table 2)

Total DCF for whole project life = 569.1m (yearly totals

less costs- see table 3)

Demonstrates positive ROI compared to project costs

New plant on-stream in 2010, creating 50 new jobs