Description
OVERVIEW: 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.
RESOURCES:
The following interactive course provides step-by-step instruction and practice with concepts related to this assessment:
The following articles cover a variety of considerations involved in making expansion decisions:
- Momani, A. M., Al-Hawari, T. H., & Mousa, R. W. (2016). Using expanded real options analysis to evaluate capacity expansion decisions under uncertainty in the construction material industry. South African Journal of Industrial Engineering, 27(2), 1–14.
- Deossa, P., De Vos, K., Deconinck, G., & Espinosa, J. (2017). Generation expansion models including technical constraints and demand uncertainty. Journal of Applied Mathematics, 2017, 1–11.
- Energy costs factor into business development, expansion decisions. (2017, February 15). Energy Monitor Worldwide.
INSTRUCTIONS:
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.
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:
- Recommendation for a course of action.
- Explanation of criteria supporting your recommendation.
- 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.
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 that information. However, for the purposes of this assessment, you can make assumptions about the values of that data or ratios in support of your recommendation.
Accounting worked with the marketing group to create the ZXY Company Financial Statements spreadsheet for the new products business and the new facility.
Notes about the financial information:
- The expense line labeled SQF FDA Mandates refers to the costs of complying with Food and Drug Administration requirements.
- Depreciation expense is calculated using 7-year life modified accelerated cost recovery system (MACRS).
Deliverable Format
Depending on the audience you choose to address, use one of the following options:
- Report for a mid-management audience. Prepare a 3–4 page report detailing your recommendation and the information you used to make your recommendation.
- Presentation for top leadership. Prepare a presentation of at least 12 slides detailing your recommendation and the information you used to make your recommendation. You may use your choice of presentation software. Include notes with additional details.
Keep in mind that your recommendation may be shared with others, so your materials should be designed for clarity and readability.
Related company standards for either format:
- The recommendation report is a professional document and should therefore follow the corresponding MBA Academic and Professional Document Guidelines, including single-spaced paragraphs.
- In addition to the report or presentation, include:
- Title (slide or page).
- References (slide or page).
- Appendix with supporting materials.
- At least two APA-formatted references.
Unformatted Attachment Preview
2/15/2019
Expansion Recommendation Scoring Guide
Expansion Recommendation Scoring Guide
CRITERIA
NON-PERFORMANCE
BASIC
PROFICIENT
DISTINGUISHED
Analyze financial
statements for decision
support.
Does not analyze
financial statements.
Identifies financial
information but does not
analyze it.
Analyzes financial
statements for
decision support.
Analyzes financial statements for decision
support, providing details that support or do not
support expansion.
Explain risks associated
with an investment
decision.
Does not explain risks
associated with an
investment decision.
Identifies risks with the
proposed investment
without explaining.
Explains risks
associated with an
investment decision.
Explains risks associated with an investment
decision and provides examples of how the risks
may play out.
Recommend a course of
action based on financial
information.
Does not recommend a
course of action based
on financial information.
Identifies a possible
course of action but does
not make a
recommendation.
Recommends a
course of action
based on financial
information.
Recommends a course of action based on
financial information and provides detailed
information about expected performance.
Explain how financial
criteria support a decision.
Does not explain how
financial criteria support
a decision.
Identifies financial criteria
that support a decision
without explaining how.
Explains how
financial criteria
support a decision.
Explains how financial criteria support a decision
in detail and using examples.
Communicate accounting
information clearly.
Does not communicate
accounting information
clearly.
Communicates
accounting information,
but some information is
not clear.
Communicates
accounting
information clearly.
Communicates clearly and engages the reader
with the fluidity of expression. There are few if
any errors of mechanics, grammar, or style.
https://courserooma.capella.edu/bbcswebdav/institution/MBA-FPX/MBA-FPX5010/181000/Scoring_Guides/u04a1_scoring_guide.html
1/1
CSTX Forecast
Forecast 11
ZXY - Forecast
Pro-Forma Income Statement
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
2.400.000
2.800.000
2.800.000
3.240.000
3.900.000
3.900.000
900.000
1.350.000
2.500.000
Brand new Acme System - full system
Income
Revenue
Product A
Product B
Total · Revenue
2.400.000
2.800.000
2.800.000
4.140.000
5.250.000
6.400.000
Pest Control
50.000
66.550
73.205
73.205
73.205
73.205
SQF FDA mandates
90.000
90.000
90.000
90.000
90.000
30.000
Cost of Goods Sold
Rent - Plant
400.000
408.000
416.160
424.483
432.973
441.632
Plant Equip. - Fklf - Scrb/Lease
40.000
64.000
64.000
64.000
64.000
64.000
Plant Equip. - Ongoing maintenance
50.000
70.000
75.000
75.000
75.000
75.000
Plant Equip. - Parts
40.000
50.000
50.000
50.000
50.000
50.000
Miscellaneous - Equipment
15.000
15.000
15.000
15.000
15.000
15.000
Building repairs
25.000
25.000
25.000
25.000
25.000
25.000
Plant supplies
100.000
120.000
144.000
109.808
120.789
132.868
Plant Utilities
120.000
210.000
240.000
240.000
240.000
240.000
30.000
45.626
52.470
52.470
52.470
52.470
Garbage removal/Janitorial
Plant telephone
7.200
7.200
7.200
7.200
7.200
7.200
495.000
675.000
825.000
885.000
915.000
975.000
Health Benefits
45.360
97.200
105.000
100.000
100.000
100.000
WC & P/R Expense
59.400
81.000
99.000
106.200
109.800
117.000
250.000
-
200.000
Plant payroll expense
Installation/Additional Equipment
Total COGS
Gross Profit
-
-
-
1.816.960
2.024.576
2.481.035
2.317.366
2.370.437
2.398.375
583.040
775.424
318.965
1.822.634
2.879.563
4.001.625
60.000
91.253
104.940
104.940
104.940
104.940
Expenses Other than GOGS
Liability Insurance
Bank Service Charges
Interest on debt
1.500
1.500
1.500
1.500
1.500
1.500
90.627
187.626
232.323
206.766
166.740
122.959
13.200
16.500
16.500
16.500
16.500
180.000
180.000
180.000
180.000
180.000
190.000
21.600
21.600
21.600
21.600
21.600
22.800
4.200
5.082
5.590
5.590
5.590
5.590
12.000
15.972
17.569
17.569
17.569
17.569
Incentive Plan
Management
Workers Comp./P/R Taxes
Health Insurance Benefit
Office/Administrative Expenses
CSTX Forecast
Forecast 11
Legal and Professional - Tax
30.000
10.000
10.000
10.000
10.000
10.000
Cellular phones
5.000
5.000
5.000
5.000
5.000
5.000
Internet Services
4.400
5.856
6.442
6.442
6.442
6.442
Postage & Delivery
Office supplies
Employee Food & Beverage
Local/Business Taxes
1.100
1.464
1.611
1.611
1.611
1.611
11.000
9.983
10.981
10.981
10.981
10.981
1.100
1.464
1.611
1.611
1.611
1.611
1.100
1.464
1.611
1.611
1.611
1.611
Property Taxes
12.000
15.000
15.000
15.000
15.000
15.000
Travel - Equip. Consultants
25.000
16.500
16.500
16.500
16.500
16.500
Licenses and Permits
10.000
10.000
10.000
10.000
10.000
10.000
Total Expense
470.627
592.964
658.777
633.220
593.194
560.613
Net Income before Depreciation
112.413
182.460
(339.812)
1.189.413
2.286.369
3.441.012
Depreciation Expense (
185.770
504.140
652.915
573.415
409.635
325.725
99.961
934.586
Tax Expense
-
-
-
-
Net Income
(73.357)
(321.680)
(992.727)
615.998
1.776.773
2.180.701
112.413
182.460
(339.812)
1.189.413
2.286.369
3.441.012
Forecast of Cash Flows
Net Income before Depreciation
Deduct startup costs
Cash flow before income taxes
Working Capital
Lease Payments - Principal
Pre-Tax Cash Flow
Taxes
After tax - Cash Flow
112.413
155.146
(42.733)
(42.733)
182.460
-
(339.812)
-
1.189.413
-
2.286.369
-
3.441.012
-
303.919
401.132
426.689
466.715
510.496
(121.460)
(740.944)
762.725
1.819.654
2.930.516
99.961
934.586
1.719.693
1.995.930
(121.460)
(740.944)
762.725
CSTX Forecast
Forecast 11
Ten Years
Year 7
Year 8
Year 9
Year 10
Total
3.900.000
3.900.000
3.900.000
3.900.000
34.640.000
3.000.000
4.000.000
4.950.000
5.500.000
22.200.000
6.900.000
7.900.000
8.850.000
9.400.000
56.840.000
73.205
73.205
73.205
73.205
702.190
30.000
30.000
30.000
30.000
600.000
450.465
459.474
468.664
478.037
4.379.888
64.000
64.000
64.000
64.000
616.000
75.000
75.000
75.000
75.000
720.000
50.000
50.000
50.000
50.000
490.000
15.000
15.000
15.000
15.000
150.000
25.000
25.000
25.000
25.000
250.000
146.154
160.770
176.847
194.532
1.405.767
240.000
240.000
240.000
240.000
2.250.000
52.470
52.470
52.470
52.470
495.388
7.200
7.200
7.200
7.200
72.000
1.005.000
1.065.000
1.095.000
1.125.000
9.060.000
100.000
100.000
100.000
100.000
947.560
120.600
127.800
131.400
135.000
1.087.200
-
-
-
-
450.000
2.454.095
2.544.919
2.603.786
2.664.444
23.675.993
4.445.905
5.355.081
6.246.214
6.735.556
33.164.007
104.940
104.940
104.940
104.940
990.776
1.500
1.500
1.500
1.500
15.000
75.071
31.993
7.539
111
1.121.754
16.500
16.500
16.500
16.500
145.200
190.000
190.000
190.000
190.000
1.850.000
22.800
22.800
22.800
22.800
222.000
5.590
5.590
5.590
5.590
54.004
17.569
17.569
17.569
17.569
168.526
CSTX Forecast
Forecast 11
10.000
10.000
10.000
10.000
120.000
5.000
5.000
5.000
5.000
50.000
6.442
6.442
6.442
6.442
61.793
1.611
1.611
1.611
1.611
15.448
10.981
10.981
10.981
10.981
108.829
1.611
1.611
1.611
1.611
15.448
1.611
1.611
1.611
1.611
15.448
15.000
15.000
15.000
15.000
147.000
16.500
16.500
16.500
16.500
173.500
10.000
10.000
10.000
10.000
100.000
512.725
469.647
445.193
437.765
5.374.724
3.933.181
4.885.434
5.801.021
6.297.791
27.789.282
299.025
240.970
124.955
33.450
3.350.000
1.090.247
1.393.339
1.702.820
1.879.302
7.100.255
2.543.909
3.251.125
3.973.246
4.385.039
17.339.027
3.933.181
4.885.434
5.801.021
6.297.791
27.789.282
3.933.181
-
4.885.434
-
5.801.021
-
6.297.791
-
27.789.282
-
558.384
370.759
149.371
7.389
3.350.001
3.374.796
4.514.674
5.651.651
6.290.402
24.439.282
1.090.247
1.393.339
1.702.820
1.879.302
7.100.255
2.284.549
3.121.335
3.948.831
4.411.100
17.339.027
CSTX Forecast
Forecast 11
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Explanation & Answer
Attached.
Running head: XYZ COMPANY EXPANSION RECOMMENDATION REPORT
XYZ Company Expansion Recommendation Report
Student’s Name
Institutional Affiliation
1
XYZ COMPANY EXPANSION RECOMMENDATION REPORT
2
Introduction
XYZ Company wants to expand its operations by introducing two new products and a
new production facility. However, the facility will be rented, and the cost of the equipment will
be $7,000,000. The organization encompasses a ten-year life; thus the selling price of the
equipment will be $1,000,000. The final thing to look at is that the organization needs a return of
12% on investments. According to the above data are given and financial information, there will
be a consideration of the recommendation of whether this is a smart investment or not.
Analysis of Financial Information
According to the information in the financial statements, the company does not support
expansion at the moment. Regarding the profit creation in the forecast financial statement, there
is a clear picture to the investors. $840,000 results from the 12% return on investment that fail
registration on XYZ financial statements year 1,2, and 3 of investing. The organization breaks
even during year four; thus the project will end up facing rejection. If allowed, the company will
incur losses, which is not wish of any given investor. Besides, the estimated value of assets of
$1,000,000 ...
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