FIN20014: Business and Law- Financial Management- Report Writing Assignment

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Internal Code: MAS1792
Report Writing Assignment:

Task:

TOPONE Inc. is analysing an opportunity to introduce a new product that is innovated by its research team for experimental offer. Experts in the field worked in the forecasting phase to predict reliable cash flows relating to this new product introduction project. This new energy drink product is named X-TRM, which is the outcome from TOPONE’s ongoing EDA research that has been started in the last year to produce a next generation energy drink for athletes.

Production manager of TOPONE is highly encouraged for X-TRM despite a possibility of health hazards in old age of some users. The unknown reason for such side effects requires further continuation of research activities for another six years when the final version of the drink is expected to be available. Accounting record shows that the company spent $150,000 for EDA research so far and paid $60,000 to experts in predicting cash flows for X-TRM project.
Estimated annual cost for the abovementioned further continuation of research will be 3% of the money spent for EDA research.

For the six-year life of the X-TRM project, new plant and equipment (P&E) would be procured from a Japanese company at a total cost of $3,500,000 including import duty of $300,000. The project will use the existing facilities of TOPONE’s production lines. Additional transportation cost of $70,000 is to be paid to bring new P&E to production site. Initial set-up cost is estimated to be $130,000 including installation cost of new P&E. Total costs for P&E would be depreciated using a tax allowable straight line rate of 15% per year. However, the company can sell P&E at the termination of the project for $400,000.

It is also estimated that the new production line will require an initial increased investment of $59,000 in stock (inventories) and $47,000 in debtors (accounts receivables) that are offset by an increase in creditors (accounts payable) of $36,000. The procurement of HR will be one-off cost at the beginning and estimated to be $50,000. As per company policy for TQM, the project requires annual TQM cost of $30,000.

Expert’s prediction report shows that the company can supply X-TRM product to retailers at an agreed price of $40 per carton. Projected sales of X-TRM would be 70,000 cartons per year when variable operating cost will be 40% of sales. Annual fixed operating cost, excluding depreciation, will be $350,000. Due to increasing competition, it is estimated that the sales will decrease by 20% in the fourth year and that will remain the same in the final two years. For decreased sales volume, variable operating cost would be 45% of sales.

Existing facilities of production lines to be used for X-TRM could be used otherwise to generate monthly net revenue of $3,000 that would not be possible once X-TRM production will commence. The sale of X-TRM will increase TOPONE brand cap sales for $24,000 per year where the total cost is 50% of sales.

The firm has a 14% weighted average cost of capital (WACC) and is subject to a 30% tax rate. The required discounted payback period is 4.5 years. The CFO requires a clear explanation of all possible issues relating to the project before taking the final decision. The CFO also asks for a detail analysis of cash flows and explanations of results of capital budgeting methods that are usually used in evaluating projects.

Required
Using Excel Spreadsheet prepare a full analysis to be presented to the CFO of TOPONE Inc. evaluating whether the X-TRM project should be started or not. Your analysis should include the following
1. Table of cash flows
2. Use of excel formulae where appropriate (refer eLearning video of Week-6)
3. A written report (1200 words, +/- 10%) outlining your recommendation as to whether TOPONE INC should proceed. Justify your recommendation using quantitative and qualitative issues and your analysis of probable risks relating to the project.

Uploaded By : jack
Posted on : February 01st, 2018
Downloads : 2

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