Reference no: EM132414721
Assignment -
Learning Objectives - This unit focuses upon the following CLO:
Detail the impact of financial statement analysis, inventory management, and investment in new projects.
Using these Unit Learning Outcomes:
1. Analyze financial statements and forecast working capital.
2. Produce the cost of production schedule and the inventories schedule.
3. Evaluate the need for new projects and describe how to value and manage risk for those new projects.
Activity 1 - Discussion
Instruction: Watch the following video and then respond to the discussion questions below:
Video - The 3 Types of Financial Statements. Phil Town's Rule #1 Investing.
What is the significance of financial statements, and who would benefit from them, and Why?
Activity 2 - Submission
Assignment - Course Project milestone
Part A - You will have two weeks to work on Sections VIII and IX of the business plan. Therefore, you do not need to turn anything in this week. During these two weeks, you will be working on the financial projections and analysis. First, in this unit, go back to the business plan and complete your plans for inventory management and control.
Next, you will begin using the spreadsheets provided by SCORE.org and you will project how you will receive your starting capital and working capital. Those financial sheets will become attachments to your business plan.
Part B - For this part of the assignment, you will need to calculate the net present value (NPV) and internal rate of return (IRR) for a new project. Since we do not know if you will be doing that for your business, you will still need practice in performing this task. You will also practice financial statement analysis. The problems are below.
1. Baxwell Tire Company is thinking about buying a new machine that will increase the speed of manufacturing and save money. The net cost of the machine is $66,000. The annual cash flows are projected as follows:
|
YEAR
|
CASH FLOW
|
|
1
|
$21,000
|
|
2
|
$29,000
|
|
3
|
$36,000
|
|
4
|
$16,000
|
|
5
|
$8,000
|
a. If the cost of capital is 10 percent, what is the net present value?
b. What is the internal rate of return?
c. Should the project be accepted? Why?
2. Yetter Electronics is considering two new investments. Project C calls for the purchase of a coolant recovery system. Project H represents and investment in a heat recovery system. The company wants to use a net present value profile to compare the projects. The cash flow and investment patterns are as follows:
|
PROJECT C
|
PROJECT H
|
|
($25,000 Investment)
|
($25,000 Investment)
|
|
Year
|
Cash Flow
|
Year
|
Cash Flow
|
|
1
|
$6,000
|
1
|
$20,000
|
|
2
|
7,000
|
2
|
6,000
|
|
3
|
9,000
|
3
|
5,000
|
|
4
|
12,000
|
|
|
a. Determine the net present value of the projects based on a zero discount rate.
b. Determine the net present value of the projects based on a 9 percent discount rate.
3. You buy a new piece of equipment for $16,980, and you receive a cash inflow of $3,000 per year for 12 years. What is the internal rate of return?
4. Erdley's Business Products is considering the purchase of a new machine at a cost of $11,070. The cash flow from the machine will be $2,000 per year for eight years. Erdley's cost of capital is 13 percent. Using the internal rate of return method, analyze this project and provide a recommendation as to whether it should be undertaken.
5. Suzanne's Restaurant Supplies is considering the purchase of manufacturing equipment that will cost $20,000. The annual cash inflows for the next three years will be:
|
Year
|
Cash Flow
|
|
1
|
$10,000
|
|
2
|
$9,000
|
|
3
|
$6,500
|
a. Determine the internal rate of return.
b. With a cost of capital of 12 percent, should the machine be purchased?
6. Go to the internet and select two companies of your choice that compete in the same type of business (for instance, you could select CocaCola and Pepsi, or Northrup Grumman and Boeing). Research their financial statements. You can search for the company's annual report. Using the financial ratios of the two companies, compare the two companies and discuss what investors would need to consider about investing in each stock. Be sure that you cover the profitability ratios, the liquidity ratios, and the debt ratios. If the company pays a dividend, discuss the payout ratio and the sustainability of the dividends. Would you purchase one of these companies or their stock?
Activity 3 - Journal Post
Instruction: What is the greatest challenge that you think you will face as you try to capitalize your business? What will the source of your personal capital? (Please do not reveal any private financial details that make you uncomfortable. But you are welcome to share if you wish.) Have you looked into the success rates for the type of business you are planning to open? What kind of inventory will you have? How will you plan for emergencies such as snowstorms, hurricanes, tornadoes, or health epidemics? What happens if your supply chain is interrupted for an extended period of time? Describe how you are thinking about financing your inventory and your operating capital.