Question
Put yourself in the following situation as a member of the ACME, which is an USA conglomerate. It owns companies across different industries, such as
Put yourself in the following situation as a member of the ACME, which is an USA conglomerate. It owns companies across different industries, such as car manufacturing, consumer goods, leisure etc. You have been requested to provide meaningful financial analysis and information for decision making concerning, capital investment, constrain in production, budgeting, and sensitivity analysis. Accordingly, you are required to write a report (1,600 words in total) providing information about these areas.
Investment Opportunities
Option one: City Centre It is expected that the City Centre showroom will increase the overall sales revenue by 10% per annum and the variable cost will be forty-two percent of sales revenue. The fixed overhead cost will be $ 3,500,000, $ 2,000,000 and $ 1,500,000 in the first, second, and third years. The promotion cost will be $ 500,000 in the first two years and $ 200,000 for the next three years. All other expenses will be 10% of the total contribution margin. In the second year, the company will need a working capital investment of $ 2 million, and 60% of which will recover at the end of project life. The company follows a straight-line depreciation method and expects to sell the assets at 20 % of historical cost in year 5. Option two: Seaside On the other hand, if the showroom is opened at Seaside, then it will require fixed overhead cost for four years $ 2,500,000 in year one, $ 1,800,000 in year three, $ 2,100,000 in year four and $ 1,100,000 in year five. All other costs will increase and be at 10% per year of the contribution margin. The working capital investment will be $ 1,500,000 in year three, and 55% of it will recover in the last year. The sales revenue will increase at 12% per annum, and variable cost will be 45% of sales. The company will follow a similar strategy for depreciation and promotional cost, just like the city centre.
Assume Corporate Tax in USA is 10% The cost of capital is assumed to be 12% Requirement Evaluate the total value addition (i.e. total NPV) and breakeven rate (i.e. IRR) of this possible restructuring decision. Also, Advise management on what to do about the above project. Your advice should be based on the analysis in Finally, Analyse the sensitivity of the projected NPV to the unit sales and the cost of capital.
Following profit statement is provided for your reference to calculate the net cash benefit by your investment manager Ms Banda]
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