Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Case What If Analysis The best experience about the ABC Corp. was how to come up with Useful and innovative products in the midst of
Case "What If Analysis"
The best experience about the ABC Corp. was how to come up with Useful and innovative products in the midst of economic adversity. Due to severe price competition, the revenues and profitability was badly affected. The designer of the products have immense pressure to come up something new as a useful product to be sold. Finally, they came up with an innovation to introduce remote control dish washer.
Consultation with retailers and customers, indicated that demand of this item would be excellent, provided the price was lower than the regular machine. The testing and development phases took almost
years and the final product passed all safety requirements.
Before being given the go ahead to go into full capacity production of the machine, the designed team had to present a detailed financial plan to the capital investment committee CIC which was chaired by the VP of Finance department, Mr
Abid Majeed. The proposal had to include detailed cost and revenue estimates with ample documentation to support the numbers,
Having a vast experience of these kinds of proposals before, the head of designed team, Sarfraz Ahmed knew that he had better take every possible factor into account and be prepared for a rigorous questions in front of committee members. Fortunately for Sarfraz, his assistant Umar who had recently earned his CFA designation, was an experienced and dependable employee. Both were very keen to come up with the best recommendations supported by the financial plan.
So the Sarfraz and Abid Majeed began collecting the necessary information. They knew that to have a comprehensive feasibility study they would have to include the following:
Pro forma statements showing expected annual revenues, variable costs, and net cash flows over the economic life of the project with appropriate supporting documents;
Break Even Analysis;
Sensitivity of the cash flows to alternative scenarios of sales growth and profit margins:
Based on the data provided by the marketing department, they prepared Table
showing the expected unit sales of the machine over its
years economic life and the expected selling price per unit. Note that the price of Rs
per unit was estimated to gradually drop to Rs
per unit over the
year period reflecting competitive pressures. Depreciation for this project was based on the
year MACRS rates as shown in Table
The cost of equipment, including shipping, handling, and installation was estimated at
million It was estimated that after
years the equipment and tools could be sold for
million
The production would be done in an unused plant of the firm. Similar plant locations could be leased for
Rs
per month. Fixed costs were estimated to be Rs
per year while variable production
costs per unit were expected to be Rs
To get the project underway, additional inventory of
would be required. The company would increase its accounts payable by
and its accounts
receivable by
Sarfraz and Abid estimated that each year thereafter, the net working capital of
the firm would amount to
of sales. The weighted average cost of capital was calculated to be
Table
Projected Unit Sales and Price
Unit Sales
Year
Unit Price
$
of
Table
Modified ACRS Depreciation Allowances
Year
Year
Year
Year
Questions:
Need to prepare pro forma Income statement with the help of given cash flows.
Conduct Scenario analysis by
plus and minus change.
Suitable calculations to realize the vulnerability of different variables in sensitivity analysis.
How should the annual interest expenses of Rs
be treated? Explain
Using the base case estimates calculate the cash, accounting, and financial breakeven.
If the company has spent
in developing the prototype of the machine. How both of them treat this item in their report.
Calculate the IRR of this project
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started