Rachel$$s Enterprises Solutions Incorporated

Balance Sheet

As at December $31,202$x

ASSETS

LIABILITIES

Cash

$ $37,000$

Accounts Payable

$ $40,000$

Marketable Securities

$10,000$

Wages Payable

$10,800$

Accounts Receivable

$63,000$

Taxes Payable

$7,200$

Uncollectible Accounts

$-2,000$

Short$-$Term Note Payable

$30,000$

Inventory

$74,000$

Interest Payable

$2000$

Supplies

$4,000$

Unearned Revenue

$20,000$

Prepaid Insurance

$7,500$

Unearned Consulting Rev.

$5,000$

Total Current Assets

$$193,500$

Total Current Liabilities

$ $115,000$

Land

$$111,500$

Long$-$Term Notes Payable

$ $50,000$

Equipment

$217,000$

Bonds Payable

$100,000$

Accumulated Depreciation

$-97,000$

Mortgage Payable

$350,000$

Building

$590,000$

Total Long$-$Term Liabilities

$$500,000$

Accumulated Depreciation

$-110,000$

Intangible Assets

$60,000$

STOCKHOLDER EQUITY

Total Long$-$Term Assets

$$771,150$

Capital Stock

$$100,000$

Paid in Capital

$140,000$

Retained Earnings

$110,000$

Total Stockholders Equity

$$350,000$

Total Assets

$$965,000$

Total Liabilities & Equity

$$965,000$

Rachel$$s Enterprises Solutions Incorporated

Income Statement and Segment EBITDA

For the $12$ Months Ending December $31,202$x

Equipment Sales Revenue

$1,333,440$

Consulting Service Revenue $($Online Help$)$

$450,000$

Total Revenue

$1,783,440$

Cost of Goods Sold

$934,450$

Selling, General & Administrative

$33,820$

Depreciation & Amortization

$58,665$

Earnings Before Interest and Tax $($EBIT$)$

$756,505$

Interest

$35,576$

Earnings Before Tax $($EBT$)$

$720,929$

Tax

$152,686$

Net Income

$568,243$

Shares Outstanding

$14,000$

Earnings Per Share

$40\mathrm{.}59$

Equipment sales EBITDA

$667,720$

Consulting Online Help EBITDA

$147,450$

Total EBITDA

$815,170$

Rachel is putting together a growth plan for ESI. She is evaluating whether to substantially invest in company owned equipment, and whether to outsource her online services personnel to a call center in New Dehli, India. Rachel has asked for your analysis of the following two decisions facing ESI:

$1.$ Equipment Purchase $-$ ESI may decide to purchase outright additional computer equipment. ESI can continue to lease equipment from hardware vendors. Such a status quo decision comes with known margins and profitability metrics. The status quo is embodied in the income statement and balance sheet reported in $202$x data given above. Rachel believes adding owned equipment to its existing leasing business will enable ESI to more fully utilize their fixed assets, grow faster and provide more customized services to a larger group of future clients. Rachel is proposing to purchase $$500,000$ of additional IT equipment. The equipment would be installed and prepared for use in the current year. When fully utilized the equipment would generate asset turnover of approximately $2$x gross investment. It would likely take four years to reach full utilization. The useful life of equipment for accounting and tax purposes is $10$ years. However, due to rapid life cycles in enterprise technology, after six years Rachel expects to sell the equipment for $10\%$ of initial cost. The EBITDA $($operating income plus depreciation and amortization$)$ margin of business done with owned equipment is $1\mathrm{.}1$x the margin of business done with leased equipment.

$2.$ Outsourcing online consultants $-$ Rachel may move her entire online service team to India. As she has tried to re$-$sign existing clients and win new business Rachel has been feeling pricing and margin pressure. For the time being Rachel has only re$-$signed or sought new business that matches her current margin profile. Rachel expects to be able to maintain the status quo in the online services business for several more years. However, for the most part Rachel$$s regional and national competitors have outsourced online support to low$-$cost countries. ESI$$s higher cost structure limits the future growth of ESI services. ESI$$s five full time online consultants each make $$60,000$ per year. The online segment cost of goods sold is a little more than the $$300,000$ paid to the consultants in the most recent year. Consulting EBITDA is approximately $$147,450.$ If ESI does not outsource its consultants it is estimated consultant margin dollars will remain about flat for the next several years. For comparison, online consultants in India make approximately $$30,000$ per year, growing at $10\%$ per year. In the first year after moving to India Rachel expects consulting EBITDA margins dollars to be the same as in the US$.$ However, in years $2$ through $10$ consulting revenue should grow by $20\%$ per year, while the increase labor cost and productivity gains of India employees should just about offset. This means ESI could maintain its current consulting EBITDA margin on a growing revenue base. Uncertainty in technology life cycles means Rachel doesn$$t think it is reasonable to plan an online services business beyond $10$ years into the future. To make the move to India, ESI would pay the cost of a fairly generous severance. It is expected US employees would receive a package valued