8006FMGT Financial Management- Risky Investment

8006FMGT Financial Management- Risky Investment

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8006FMGT Financial Management

Task:

Write a 2,500-word report based on the provided context scenario and financial information. Analyse two options proposed by the management team of the case study company to maximise its value.

Conduct the necessary financial analysis using the information provided and using appropriate techniques, tools and frameworks. Make decisions and recommendations based on the analysis and consider all relevant implications, challenges and limitations.

Referencing is Australian Harvard (AGPS) and outlined in the AIB Style Guide. Note: Insert this summary description when submitting a draft to Smarthinking. Learning Outcomes Demonstrate understanding of core contemporary financial management theory, techniques and practice.

Critically evaluate and effectively communicate recommendations to address financial management issues. Apply financial management theory and techniques to professional practice in an ethical manner.

Task Context Assessment 2 follows on from the financial review of Amazing Lounge Pty Ltd (AL Pty Ltd) undertaken in Assessment 1. Management team have brainstormed two options with the objective of maximising AL’s value.

Being part of the management team, you have been asked to investigate the possibility of different options. The two options A and B are outlined below. Option A: Invest in a new product AL Pty Ltd, is planning to introduce a new model of lounge shortly.

The new machinery required to manufacture the new model costs $20,000,000 and has a useful life of 5 years. The machine will be depreciated during these years as per the straight-line method. The machine will have no scrap value at the end of its life.

AL Pty Ltd has done the market research and estimated to sell 10,000 units of the new model at the selling price of $4,200 per unit. Each unit will cost $2,500 to produce. This will also require an additional working capital in the beginning year 1 of $2,000,000 which will be recovered in year 5. For option A, you are provided with the incremental financial information in the table below.

Incremental financial information for option A To evaluate the above project, utilise the capital budgeting techniques that you have studied in this subject. For this purpose, the finance analyst recommended a 10% required rate of return.

Option B: Outsource the current manufacturing plant overseas AL Pty Ltd is investigating an opportunity to relocate its manufacturing plant to another country to manufacture the current model of lounge.

Through the outsourcing program, it is expected that the unit variable cost will be reduced by $100, and the total cash fixed cost will drop by $3,000,000. The cost reduction will be achieved through access to cheap labour and different material composition.

Current cost structure per annum (pre-outsourcing) is given in the table below: Number of units produced per annum 20,000 Sales price per unit $1,000 Variable cost per unit $400 Total cash fixed cost per annum $10,000,000 Total depreciation per annum $4,000,000 You have been asked to assess the above plan and present your recommendations.

Print version: financial information for Option A & Option B Written Report Write a report for the management team that addresses points 1 to 4 below: Complete a financial evaluation of Option A using both NPV and simple Payback Period (not the discounted payback) capital budgeting techniques.

Discuss which one is better and why.

Use the payback cut-off period of 2 years for the evaluation, and use 10% as the discount rate to calculate the NPV.

In assessing Option A, your report should also consider a sensitivity analysis on the NPV for the discount rate changing from 10% to 15%. Investing in a new product can be classed as a ‘risky investment’.

How can the risk-return principle be applied here and, from a financial modelling point of view, how can the risks of the project be analysed? Complete a critical assessment of Option B using break-even analysis

Calculate and evaluate the current accounting and cash break-even points of the business. Your analysis of Option B should then include the revised break-even points (both cash and accounting break-even points) considering the outsourcing option.

Based on market research, you anticipate sales with the new outsourcing option to remain the same at 20,000 units. Comment on the financial and non-financial implications of Option B. A further idea briefly discussed by the AL executive team (but not as an option) was to extend the payment terms for customers from 30 days to 60 days.

What are the implications of increasing the payment terms of customers to the cash cycle?

Discuss possible scenarios where providing an extended payment term can benefit AL Pty Ltd.

Based on your analysis covered in points 1 and 2, recommend either Option A or Option B, or both, to the AL management team.

Your recommendation should also include a detailed limitations section covering the challenges of using NPV, Payback Period and break-even points in the decision making.

In each section of your report, please define the financial concepts and/or critical theories before calculations/analyses. The required word length for this report is 2,500 words (plus 10% tolerance, excluding tables and reference list.

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