Assignment 1

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British Columbia Institute of Technology *

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Feb 20, 2024

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FMGT 7210 – Assignment # 1 TO: Andreas Lopez FROM: DATE: September 22, 2021 SUBJECT: Goat Rental Business - Expansion Introduction The purpose of this memo is to advise Mr. Lopez on whether or not to proceed with the opportunity to expand the goat rental business. Given the issues we have identified, we will put forth a recommendation that best addresses our issues listed below. In order to make a calculated decision, we have performed a cost-volume-profit analysis, payback period calculation, and incremental cash flows to evaluate the investment. We have made a decision by devising three alternatives and determining which would result in the best possible outcome for Mr. Lopez based on four decision criteria. To conclude, we will cover the implementation of our chosen recommendation. Key issues o Risks associated with new business ventures o Only able to generate modest profits, business is not very lucrative o Insufficient staff to keep up with client demand for land clearing work in difficult areas Solution From the results of our analysis of Mr. Lopez’s new business venture, we encourage Mr. Lopez to purchase the larger truck and trailer to expand the goat rental operation. Impact Proceeding with the purchase of the larger truck and trailer will generate a relatively high internal rate of return. Over the next five years, the return on investment can be expected to increase by 26.2%. The initial investment cost will be paid back in 2.7 years. Expanding the Goat rental operation will provide a steady income stream to complement the earnings from dairy goat farming.

FMGT 7210 – Assignment # 1 Analysis In forecasting the maximum number of jobs, it illustrates that the larger truck and trailer will be more productive in completing jobs. Thus, gaining the ability to accept six additional jobs per year in comparison to the current truck and trailer (see Appendix 1, Table 1). Consequently, in conducting a cost-volume-profit analysis, we indicated that the larger truck and trailer will be over three times as profitable as the current truck and trailer (see Appendix 1, Table 2). In addition, the discounted cash flow analysis indicates that the break-even point/cost of the investment in a larger truck and trailer will be recovered in 2.7 years (see Appendix 1, Table 3). These results indicate that the investment in a larger truck and trailer will greatly be beneficial for the goat rental operation expansion. Alternatives Alternative 1: Expansion with the Acquisition of the Larger Truck and Trailer With this, Lopez will be able to transport more goats to the job site and thus will be able to accept more jobs to increase earnings. In addition, Lopez will be able to temporarily dominate the market for goat rental services since he is one of the pioneers in this line of business, provided that barriers to entry are kept high. The drawbacks with this include increased capital requirements and business risks. Other than the larger truck and trailer, other expenditures associated with the expansion include transportation, maintenance, and other overhead costs. Furthermore, there is also the risk of failure to produce anticipated results due to the business’ immature and uncertain state. Alternative 2: Keep the Existing Truck and Trailer The primary benefit of this alternative is to lessen capital requirements in the short run since the existing truck still has a remaining useful life of 5 years. Lopez can then direct these cost savings to other aspects such as marketing and research and development. On the other hand, one disadvantage is that he will not be able to accept more jobs. As a result, he may lose customers to competitors with greater capacity. Another is that Lopez’s earnings will be stagnant as growth will be limited. Alternative 3: Abandon the goat rental business completely With this alternative, the benefit is that Lopez’s focus will not be shifted away from his core business. All his existing resources will be devoted to a business that he is already an expert in, allowing him the opportunity to excel more in the goat dairy farming industry. One of the disadvantages of this is the opportunity cost of passing on a potentially profitable business. Several local governments had already considered goats as a cost-effective, environmentally sensitive way to maintain large areas that are difficult to reach. Thus, more people will be inclined to seek goat rental services for land clearing. Furthermore, Lopez’s earnings will be limited only to earnings from his goat dairy farming business.

FMGT 7210 – Assignment # 1 Decision Criteria Increase Profit ● The purpose of expanding the business is to enhance the revenue Mr. Lopez is currently making from the dairy goat farm. ● An increase in profit will significantly add to the current revenues. Customer Retention ● Without investing in marketing the company will rely on customers satisfaction ● This is a concern as without marketing further growth solely relies on returning customers and word of mouth ○ important customers are happy with the results Cost-Effective ● Cost is a major concern for Mr. Lopez ● ensure the costs incurred will not change much through expansion and growth ○ as revenue goes up costs will not increase at the same rate ■ Ensures the company is profitable Increasing productivity ● Will the solution provides the most benefit to Mr.Lopez ○ Expanding will allow for more jobs to be done in a year ○ The expansion will not take away from the dairy farm business Decision Criteria Table 1 Criteria Alternative 1: Expansion with Larger Truck and Trailer Alternative 2: Keep the existing truck and trailer Alternative 3: Abandon goat rental business Increased profit 🗸 Customer Retention 🗸 Cost-Effectiveness 🗸 🗸 Increasing Productivity 🗸

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FMGT 7210 – Assignment # 1 Recommendation Our recommendation is for Mr. Lopez to invest in the expansion of the goat rental business and make a further investment to acquire a larger truck and trailer. The business has profit potential and Mr. Lopez will generate a positive net present value with a significantly high internal rate of return. The estimated costs associated with each job with the business expansion would equate to $921.50 (per job) + $190, per calendar day for the Shepherd and the dog (See appendix 1, Table 3). In addition, the larger truck and trailer investment would be a total of $24,475 (See appendix 1, Table 2). Annual costs would equate to approximately $105,022 (See appendix 1, Table 3). It would take Mr. Lopez approximately 3-6 months to implement the expansion of the business. Implementation ● Purchase the large truck and trailer to increase profit ● Contract with the shepherd to ensure employment and include non-competition clause ● Negotiate 5-year service agreement with resort to guarantee part of the revenue ● Expand product lines such as goat dairy products and goat meat

FMGT 7210 – Assignment # 1 Appendix This is a space for all detailed calculations. Remember, any tables, figures, charts, etc. must be numbered and titled (i.e., Table 1 – Cost Volume Profit Analysis) regardless of where they appear in the memo or appendix. Table 1 - Maximum Jobs per Year with Existing and Larger Truck and Trailer Truck and Trailer Existing Larger Average Job Size (sq. ft.) 43,560 43,560 Forage Area per Goat (sq. ft.) 250 250 Goat Days Needed 174 174 Trailer Capacity (Goats) 25 32 Calendar Days Needed 7 6 Work Days per year 250 250 Maximum Number of Jobs per year 35 41 Table 2 - Annual Incremental Revenues and Costs for Existing and Larger Truck and Trailer (in U.S. dollars) Truck and Trailer Existing Larger Incremental Revenues $91,875 $118,080 $26,205 Variable Costs: Transportation (12,348) (24,600) (12,252) Shepherd and dog (46,550) (46,740) (190) Fixed Costs: Setup (3,500) (4,100) (600) Fencing (25,253) (29,582) (4,329) Total Costs (87,651) (105,022) (17,371) Profit $4,224 $13,058 $8,834

FMGT 7210 – Assignment # 1 Table 3 - Discounted Cash Flow Analysis for Incremental Cash Flows from Expansion Description Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial Investment -$24,475 Proceeds from Sale of Old Truck and Trailer 500 Incremental Cash Inflows 26,205 26,205 26,205 26,205 26,205 Incremental Cash Outflows Transportation (12,252) (12,252) (12,252) (12,252) (12,252) Shepherd and dog (190) (190) (190) (190) (190) Setup (600) (600) (600) (600) (600) Fencing (4,329) (4,329) (4,329) (4,329) (4,329) Salvage Value - Larger Truck and Trailer 2,500 Cash Flows -$23,975 8,834 8,834 8,834 8,834 11,334 Payback Period (years) 2.7 Present Value at 12% Discount Rate -$23,975 7,888 7,042 6,288 5,614 6,431 Net Present Value $9,288 Internal Rate of Return 26.2%

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Assignment 1

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