MBA-FPX5010_VitosGarciaJavierAndres_Assessment4_1

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1 Expansion Recommendation (Javier A Vitos Garcia) Capella University Daniela Pavel Nov 12, 2023 MBA-FPX5010

Expansion Recommendation 2 Instruction – Evaluation Scenario Ambitious food company ZXY is putting its green thumbs to work, aiming to sprout a new plant and expand its delicious empire. Get ready to dig deep into those pockets, as this expansion invites you to splash out $7,000,000 on some shiny new gear. Don't worry, though, because these trusty machines will serve you faithfully for a solid decade, and if luck is on your side, you'll be able to get a whopping $1,000,000 back when it's time to say goodbye to them. They intend to rent the premises. ZXY wants a titanic 12% ROI, as if they were trying to squeeze blood from a stone! Provide a recommendation on the investment decision. Financial Information’s Analysis By estimating ten times the expected useful life of the equipment, ZYX generates an expected profit and loss account and an expected overflow account. From the revised statements, the figures have been recorded gradually, but they are insufficient to finance the desired expansion expenses. A new product may be produced until a fourth substitute is made because the expected return does not reach the 12% required for the success of the investment. The annual profit from the first three investments, which had a 12% return on the initial $7 million, remained constant at $840,000. An example: A product with the new product has a projected cash flow deficit of $73,357. The company expects $615,998 in positive cash flow under the fourth option but remains in debt due to lost wages. Whether that revenue portal is still active for the company, the company may remain in the red until halfway through the device's projected lifespan, specifically the fourth round of the fifth day. After Wednesday, the net profit increased steadily. Product B must be produced four times for the company to achieve positive net income.

Expansion Recommendation 3 Your net income for this period will be $615,998, as shown below. The company forecast growth for the fourth consecutive year: product growth. If the company is unsuccessful initially, it will probably be successful in 4 or 5 years. The cash flows of $6,947,667.83, resulting from a rate of 12% and a useful life of ten years, are less than the initial investment of $7,000,000. The expansion currently has a negative NPV of - $52,332.17. With a 10% discount percentage, the NPV would be $8,023,305.91, exceeding the initial investment and producing a profit. After ten years of production, the approximate financial value of products A and B, as assessed by the company's financial statements, would exceed $56 million—projected gross profit: $33,164,007; net profit: $17,339,027. Screenshot from Company’s Financial Statement:

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Expansion Recommendation 4 Investment risks Risk is always present in all business decisions. Management must consider internationalization as a primary factor when evaluating investment projects. Entrepreneurs must consider potential risks when evaluating the viability of a new venture. Entrepreneurs mainly focus on financial, business, and market risks. This expansion poses significant risks for the company, as more than the net income for the first three years will be needed to alleviate the stress. Diligent efforts are required to increase net income before the fourth or fifth year when notable financial improvement is expected. Continually analyze company finances in the first four years to identify cost savings and profit maximization opportunities. Comparison of Straight-Line Depreciation with MACRS Fixed assets are depreciated annually by a constant amount using straight-line depreciation. Depreciates a fixed asset over its useful life. In each accounting period, the asset's cost decreases by the same amount based on straight-line depreciation. MACRS is an American tax depreciation system. MACRS depreciates assets by deducting their capitalized cost over a specified period. The classes under the MACRS system determine the depreciation periods of fixed assets (Kagan, 2021). The financial and accounting system may not be reliable for expansion since the initial investment of $7,000,000 would take seven years to recover. Straight- line depreciation represents eventual loss, unlike MACRS depreciation. The MACRS allows you to amortize the principal value of the asset over a specific period. Recommendation

Expansion Recommendation 5 The purpose is to achieve financial stability before expanding, which means waiting at least four years of operation. The financial statements, balance sheets, and cash flows show the lack of profits in the first three years. The expected cash flow can be obtained by multiplying your original investment of $7,000,000 by 12% and then subtracting the original investment. We subtract the cash flow and multiply it by the investment for -50,883.10. The discounted cash flow from the investment is further improved to $1,025,581.87 with a 10% return on investment. Based on these calculations, the company should keep the initial investment at $7,000,000. Changing the rate of return to 10% would give the company a net worth of $1,025,581.87 over ten years, offering more excellent stability. Conclusion The company's financial statements do not indicate any recommended expansion for the first three years due to the improvement in net income that occurred only in the fourth year. To cover the cost of expanding production, ZYX's return on investment must be $840,000 with an initial investment of $7,000,000 and a required rate of return of 12%. Sell 12% of the shares at a 10% discount to increase the investment to $1,025,581.87 while maintaining the initial investment of $7,000,000. This will improve the business's finances and allow for production expansion. The company's financial statements did not demonstrate the viability of the target in the first three years but showed strong revenue growth after the fourth year for possible expansion.

Expansion Recommendation 6 Reference FreshBooks. (2022). What is Straight Line Depreciation? Retrieved from: https://www.freshbooks.com/hub/accounting/straight-line-depreciation#:~:text=Straight %20line%20depreciation%20is%20a,amount%20for%20each%20accounting%20period . Kagan, Julia. (July 30, 2021). Modified Accelerated Cost Recovery System (MACRS). Retrieved from: https://www.investopedia.com/terms/m/macrs.asp

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