FINA - CASE Portfolio Assignment: Larry and Janice Martin have decided, after 20 years of working for others, that they wanted to open their own business. CompuTech would be a repair and sales shop in the Kitchener area. Between the two of them they thought that their experience in sales and service, along with their passion to strike out on their own, would serve as a great base. As they prepared their Business Plan and the related financial projections they knew that there would be many business, operational and financial decisions that they would need to consider. This was to be important not only as they were sketching out their plan but also once the business started operating. To get as full a preparation as possible they approached a number of small business consultants at local banks and with the local small business office of the local government. Not only were they reminded that they needed a unique offering but also the need to manage successfully each and every day. Beyond planning, operating and organizing they would need to operate their business and make decisions based on results. To make sure of this they needed the ability to read financial statements and analyze the results of their decisions before considering next steps. To succeed they were reminded that they needed to operate to generate profits, to be able to pay bills and to grow the business through investment and growth. Further they knew that investing decisions at the start and throughout the life of the business, operating decisions on a day to day basis and above all financing decisions as to where and how to use monies from investors to make the greatest returns.Step : 1 Larry and Janice intend to invest $200,000 in the business. Their financial projections show that during the first year of operations their business could generate $25,000 in profits. Subsequent years could grow well beyond this level. The couple could borrow on a long term basis $100,000 from the bank (@6%) and they could use $100,000 of their savings (which were currently generating 8% returns). Q1: With the above info what is CompuTech's projected return on investment in year 1? What is the pre-tax average Cost of Capital ?Q2: Should the couple launch their business based on your answer to Q1? Why or why not? Q3: If small business is taxed at 33% what is the business' Weighted Cost of Capital?

Step 2:The Martins know that setting up some projected Income Statements are important. They need to look at what the first year of operations ( ending Dec 31st, 2021 ) might look like and if possible theywill need to look at the years thereafter to get an impression of what the long term might look like.

RM Purchases: $175,000* (Raw Material Purchases is a part of COGS)

Sales Salaries: 80,000

Advertising: 3,000

Travel: 2,000

Revenue: 350,000

Financing Costs: 10,000

Freight-In: 2,000

Income Taxes: 13,000

Sales Com'n: 2,000

Depreciation: 38,000

A second financial statement that is key to understanding a business is the Balance Sheet. The Martins have estimated the following accounts to be a part of their Balance Sheet.

Trade Receivables: $35,000

Cash: 15,000

Short Term Loan: 30,000

Share Capital: 100,000

Long Term Liabilities: 60,000

Property, Plant: 170,000

Prepaid Expenses: 5,000

Yearly LTD Retirement: 5,000

Retained Earnings: 25,000

Accumulated Dep'n: 38,000

Current Payables: 17,000

Inventories: 50,000

Q1: With the above accounts, make a CompuTech's Income Statement for the year ending,December 31, 2021. Q2: With the above accounts, prepare CompuTech's Balance Sheet as at December 31, 2021. Q3: Which of the above accounts are FIXED, and which are VARIABLE? Q4: What is the COGS for the year 2021?

Step 3:Profit decisions are important to the Martins. These decisions not only arise from understanding the market, pricing policies and margins the managers need to understand the tools and elements they need to consider as they target either profit levels or their ability to manage the elements of the profit calculation. For example, if CompuTech is operating at a loss or below BREAK EVEN then understanding how they might be able to manage costs, or volumes to generate profits becomes very important. BREAKEVEN analysis can help the Martins and CompuTech decide on any of the following: how many units they need to sell, what price should they sell at (and compared to what the market will bear), what levels their fixed costs are at, what product or service should a company promote more or less. Assuming the following: (i) the sales price for each CompuTech product sold is $50; (ii) each product sold costs $25 in Raw Material components; and the business Fixed Cost is as determined in your Dec 31st, 2021 Income Statement.

Q2: What is the BE in units for CompuTech in 2021? What impact would occur to the BE if the variable cost of materials rose by 10% during the year?

Q3: Deleted from original case

Q4: If CompuTech were to hire a Sheridan student (annual cost for Part Time service $20,000 per year) to help in the marketing of CompuTech, what would the impact be on the company's BE?

Q5: If the Sheridan student could impact unit sales by 20% growth, would their hiring be justified? Explain.

Q6: With the following information for 2022 prepare a pro-forma Income Statement for the year ending December 31, 2022, and then, calculate CompuTech's (a) income before taxes, (b) contribution margin and (c) PV ratio.

RM Purchases: $205,000

Freight In: 4,000

Sales Salaries: 60,000

Commissions: 3,000

Travel: 3,000

Advertising: 5,000

Admin Salaries: 38,000

Revenue: 420,000

Depreciation: 40,000

Office leasing: 7,000

Finance Costs: 14,000

Income Taxes: 13,000

Q7: Assuming that the price per unit and the variable cost per unit have stayed the same as in calculations for 2021, what is the new BE in units for CompuTech in 2022? How does this compare to the BE in units for the previous year?

PART 2: Larry and Janice Martin continue with their ambitions. CompuTech would be a repair and sales shop in the Kitchener area. As they prepared their Business Plan and the related financial projections they knew that there would be many business, operational and financial decisions that they would need to consider. This was to be important not only as they were sketching out their plan but also once the business started operating. To succeed they were reminded that they needed to operate to generate profits, to be able to pay bills and to grow the business through investment and growth. Further they knew that investing decisions at the start and throughout the life of the business, operating decisions on a day to day basis and above all financing decisions as to where and how to use monies from investors to make the greatest returns.

MODULE 5: Reflecting upon the Balance Sheet and the Income Statements for 2021 that you prepared in Module 2 of the Case:

Q1: What is the company's expected Current Asset level? What is the company's Net Property & Plant level?

Q2: Looking at your Income Statement and Balance Sheet from Module 2 what is the projected CompuTech's Average Collection Period in days ? What is the company's Inventory Turnover rate?

Q3: If the company wished to exhibit a 30 day receivable average, what would their level of Accounts Receivable become? If they were able to invest the savings at 7% what would their impact on profits be?

Q4: If CompuTech's competition is experiencing a 6 X turnover on inventory, is CompuTech matching this performance, and if not what level of inventory should they be displaying?

MODULE 6: Larry and Janice have retained an accountant to help them understand their cash position in their projected first year of operations (they plan to open their business on January 1, 2021). The accountant has reviewed their latest projections for 2021 and since they were planning to go ahead with their business he was keen to help them prepare a cash budget for the first 6 months of 2021. She advised the Martins that it was imperative that they preserve liquidity in this first phase of their business.

Several assumptions need to be reflected in the cash budget. Revenues are estimate to be $30,000 per month; it is estimated that 40% of the customers would pay immediately while 60% would pay up between 30 and 60 days. Their COGS is estimated to be $11,000 per month and the accountant suggested that 50% of their COGS should be paid at the time of purchase with the remaining 50% delayed until the next month. Salaries at $9,000 per month, Lease Costs of $1,200 per month, Utilities of $300 per month, Office Supplies of $100 per month and Advertising of $200 per month need to be accounted for and paid out in each month. Federal Tax installments of $4,000 in March and $5,000 in June also need to be recorded.

Q1: Assuming that CompuTech will begin operations with a Cash Balance of $10,500 on January 1, 2021 please complete a Cash Budget for the Martins to share with their accountant.

Q2: What impact on the Cash Budget would an increase in COGS were to increase by 30% due to product sourcing problems arising from the pandemic? Further it is estimated that customers may delay their payments resulting in only 20% paying immediately with the remaining 80% carrying over until the second month as AR. What would the Martins have to plan for if the above issues unfolded?

MODULE 7: It is 2022 and CompuTech has decided to expand its business. They have the choice of taking over a competitor in their community and expanding their market presence or they can open a second business which is a franchise opportunity. In the first option the takeover cost would be $300,000 and would result in net cash flow of $60,000 per year beginning in the second year of ownership. No net cash flow is expected in the first year as takeover expenses would offset any proceeds. It is estimated that the business begin acquired could have a residual value of $200,000 in the 10th year. This second option involves franchising at a cost of $75,000 per year with the potential to bring in $100,000 of net profits in each year, beginning in year 2. No proceeds are forecast in year 1. The franchise would run for only 8 years.

Q1: If the CompuTech cost of capital is 7% which of the options available to the Martins would you recommend? Remember to do a NPV calculation, a Payback calculation, and an IRR calculation to support your answer.

REFLECTION: What learnings have you experienced as you investigated the Martins story? What issues did you recognize as they considered firstly launching the business, and secondly in handling expansion