Prepare either a 3-4 page report or a 12-slide presentation in which you analyze financial information and risks associated with an investment to expand an organization and make a recommendation on whether or not to invest in expansion.
Introduction
This portfolio work project will allow you to review information and risks associated with an investment to expand an organization. As this information will be shared broadly across the organization, you will have a choice in your final deliverable audience and will organize your deliverable to meet the needs of that audience.
Scenario
ZXY Company is a food product company. ZXY is considering expanding to two new products and a second production facility. The food products are staples with steady demands. The proposed expansion will require an investment of $7,000,000 for equipment with an assumed ten-year life, after which all equipment and other assets can be sold for an estimated $1,000,000. They will be renting the facility. ZXY requires a 12 percent return on investments. You have been asked to recommend whether or not to make the investment.
Your Role
You are an accounting manager. Your boss has asked you to review and provide a recommendation on the expansion based on information that has been provided.
Requirements
In preparing and supporting your recommendation to either make the investment or not, include the following items as part of your analysis:
Analysis of financial information.
Identification of risks associated with the investment. Consider:
How risky the project appears.
How far off your estimates of revenues and expenses can be before your decision would change.
The difference if the company were to use a straight line versus a MACRS depreciation.
Recommendation for a course of action.
Explanation of criteria supporting your recommendation.
Financial Information
As part of your analysis you might find that additional information from marketing, accounting, or finance would be useful in making an informed and well-supported recommendation. In a real workplace setting you would have the ability to ask for t
Full Answer Section
-
- Cost of goods sold, incorporating production costs, raw materials, and other related expenses.
- Operational expenses, including rent, labor, utilities, and marketing.
- Tax expenses based on projected profits.
- Investment and Depreciation: The $7 million investment in equipment needs factoring for depreciation using both straight-line and MACRS methods. Calculating depreciation will impact net income and cash flow, affecting the overall financial picture.
- Net Income and Return on Investment: Determining the annual net income after accounting for all expenses and depreciation in both straight-line and MACRS scenarios will reveal the project's profitability.
- Discounted Cash Flow Analysis (DCF): To accurately compare present-day costs with future returns, performing a DCF analysis is crucial. This will reveal the project's Net Present Value (NPV) and Internal Rate of Return (IRR), indicating its financial viability relative to the company's required 12% return on investment.
Identification of Risks:
- Market Risk: Assessing the demand for the new products is crucial. Uncertainties in consumer preferences, competition, and changes in food trends can significantly impact projected revenue.
- Production Risk: Unexpected issues with new equipment, production processes, or raw material availability can lead to cost overruns and delays.
- Operational Risk: Renting a new facility presents potential challenges, such as unforeseen rent increases, maintenance costs, or logistical inefficiencies.
- Financial Risk: Unforeseen economic downturns or inflation can impact consumer spending and increase operational costs, jeopardizing profitability.
Sensitivity Analysis:
To gauge the project's resilience to potential deviations from projected estimates, a sensitivity analysis is essential. This involves examining how changes in key variables, such as sales volume, product price, or material costs, might affect profitability and the decision to invest.
Recommendation and Justification:
Based on the comprehensive analysis of financial information, considering various risks and sensitivity analysis, a well-justified recommendation can be made for or against the expansion. The conclusion should be supported by:
- Quantitative data: Projected financial statements, DCF analysis results, and sensitivity analysis findings.
- Qualitative factors: Assessment of market potential, operational considerations, risk mitigation strategies, and alignment with the company's overall goals.
Additional Information:
To solidify the analysis and recommendation, requesting additional information from relevant departments may be necessary. This could include:
- Marketing department: Detailed market research data and sales forecasts for the new products.
- Finance department: Historical financial data, current borrowing rate, and risk management protocols.
- Operations department: Production capacity analysis, potential challenges with new equipment, and rental agreement details.
Conclusion:
By rigorously analyzing financial information, identifying and assessing potential risks, and incorporating sensitivity analysis, we can reach a well-supported recommendation for or against ZXY Company's proposed expansion. This report provides a framework for further analysis and discussion, ultimately aiding ZXY in making an informed and strategic decision about their future.
Next Steps:
Following the analysis and recommendation, further discussion with company leadership is crucial to address any concerns and refine the proposed plan. If the recommendation is to proceed with the expansion, a detailed implementation plan outlining resource allocation, timelines, and risk mitigation strategies should be developed.
Sample Answer
Expansion Recommendation for ZXY Company
Introduction:
This report analyzes the financial information and risks associated with ZXY Company's proposed expansion into two new food products and a second production facility. Based on financial data and assessment of potential risks, I will provide a recommendation for or against the investment, along with justifications for my conclusion.
Analysis of Financial Information:
- Projected Revenues and Expenses: Based on the provided information, detailed calculations are needed to accurately project total revenue and expenses for the ten-year period. These projections should involve:
- Revenue estimates for both new products, considering market research and sales forecasts.