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SCENARIO

ZXY Company is a food product company. ZXY is considering expanding to two new products and a second production facility. The food products are staples with steady demands. The proposed expansion will require an investment of $7,000,000 for equipment with an assumed ten-year life, after which all equipment and other assets can be sold for an estimated $1,000,000. They will be renting the facility. ZXY requires a 12 percent return on investments. You have been asked to recommend whether or not to make the investment.

Expansion Recommendation

Introduction

This portfolio work project will allow you to review information and risks associated with an investment to expand an organization. As this information will be shared broadly across the organization, you will have a choice in your final deliverable audience and will organize your deliverable to meet the needs of that audience.

Scenario

ZXY Company is a food product company. ZXY is considering expanding to two new products and a second production facility. The food products are staples with steady demands. The proposed expansion will require an investment of $7,000,000 for equipment with an assumed ten-year life, after which all equipment and other assets can be sold for an estimated $1,000,000. They will be renting the facility. ZXY requires a 12 percent return on investments. You have been asked to recommend whether or not to make the investment.

Your Role

You are an accounting manager. Your boss has asked you to review and provide a recommendation on the expansion based on information that has been provided.

Requirements

In preparing and supporting your recommendation to either make the investment or not, include the following items as part of your analysis:

· Analysis of financial information.

· Identification of risks associated with the investment. Consider:

· How risky the project appears.

· How far off your estimates of revenues and expenses can be before your decision would change.

· The difference if the company were to use a straight line versus a MACRS depreciation.

· Recommendation for a course of action.

· Explanation of criteria supporting your recommendation.

Financial Information

As part of your analysis you might find that additional information from marketing, accounting, or finance would be useful in making an informed and well-supported recommendation. In a real workplace setting you would have the ability to ask for that information. However, for the purposes of this assignment, you can make assumptions about the values of that data or ratios in support of your recommendation.

Accounting worked with the marketing group to create the ZXY Company Financial Statements spreadsheet provided in the Resources for the new products business and the new facility.

Notes about the financial information:

· The expense line labeled SQF FDA Mandates refers to the costs of complying with Food and Drug Administration requirements.

· Depreciation expense is calculated using 7-year life modified accelerated cost recovery system (MACRS).

Deliverable Format

Depending on the audience you choose to address, use one of the following options:

· Report for a mid-management audience. Prepare a 3–4 page report detailing your recommendation and the information you used to make your recommendation.

· Presentation for top leadership. Prepare a presentation of at least 12 slides detailing your recommendation and the information you used to make your recommendation. You may use your choice of presentation software. Include notes with additional details.

Keep in mind that your recommendation may be shared with others, so your materials should be designed for clarity and readability.

Related company standards for either format:

· The recommendation report is a professional document and should therefore follow the corresponding MBA Academic and Professional Document Guidelines, including single-spaced paragraphs.

· In addition to the report or presentation, include:

· Title (slide or page).

· References (slide or page).

· Appendix with supporting materials. 

· At least two APA-formatted references.



Running head: XYZ COMPANY EXPANSION RECOMMENDATION REPORT 1

XYZ COMPANY EXPANSION RECOMMENDATION REPORT 6


XYZ Company Expansion Recommendation Report

Student’s Name

Institutional Affiliation

Introduction

XYZ Company wants to expand its operations by introducing two new products and a new production facility. However, the facility will be rented, and the cost of the equipment will be $7,000,000. The organization encompasses a ten-year life; thus the selling price of the equipment will be $1,000,000. The final thing to look at is that the organization needs a return of 12% on investments. According to the above data are given and financial information, there will be a consideration of the recommendation of whether this is a smart investment or not.

Analysis of Financial Information

According to the information in the financial statements, the company does not support expansion at the moment. Regarding the profit creation in the forecast financial statement, there is a clear picture to the investors. $840,000 results from the 12% return on investment that fail registration on XYZ financial statements year 1,2, and 3 of investing. The organization breaks even during year four; thus the project will end up facing rejection. If allowed, the company will incur losses, which is not wish of any given investor. Besides, the estimated value of assets of $1,000,000 is not guaranteed. According to Horcher (2011), the current amount has a higher cost compared to future money.

Based on the forecasted income statement, the projected revenue after ten-years between product A and B is $56,840. The expected cost of goods sold is $23,675,993 that indicates the projected gross profit of $33, 164,007 (after 10-years). There are other expenses, which are not included under the cost of goods sold; thus the value predicted is $5,74,724, depreciation expenses at $3,350,000, and tax expenses at $7,100,255. The last projected net income after ten-years of the project is $17,339,027.

Methods of depreciation are as follows. Straight line depreciation receives the initial expense of the equipment, the value after its most significant life together with the number of years in the lifespan. Following the case of XYZ Company, straight line depreciation will be as highlighted below.

Year

Asset Value Year Start

Depreciation Expense

Accumulated Depreciation

Book Value Year End

1

$7,000,000.00

$6,000,000.00

$600,000.00

$6,400,000.00

2

$6,400,000.00

$6,000,000.00

$1,200,000.00

$5,800,000.00

3

$5,800,000.00

$6,000,000.00

$1,800,000.00

$5,200,000.00

4

$5,200,000.00

$6,000,000.00

$2,400,000.00

$4,600,000.00

5

$4,600,000.00

$6,000,000.00

$3,000,000.00

$4,000,000.00

6

$4,000,000.00

$6,000,000.00

$3,600,000.00

$3,400,000.00

7

$3,400,000.00

$6,000,000.00

$4,200,000.00

$2,800,000.00

8

$2,800,000.00

$6,000,000.00

$4,800,000.00

$2,200,000.00

9

$2,200,000.00

$6,000,000.00

$5,400,000.00

$1,600,000.00

10

$1,600,000.00

$6,000,000.00

$6,000,000.00

$1,000,000.00

According to Marshall, McManus, & Viele (2017), the Modified Accelerated Cost Recovery System (MACRS) is the method stated in the Internal Revenue Code for depreciation deduction calculations. However, 7-year depreciation of the MACRS schedule will be as shown in the table below.

Year

Adjusted basis

Rate %

Deprecation

Cumulative

Method

1

$7,000,000.00

12.29

$1,000,000.00

$1,000,000.00

DB

2

$6,000,000.00

24.49

$1,714,286.00

$2,714,286.00

DB

3

$1,285,714.00

17.49

$1,224,490.00

$3,938,776.00

DB

4

$3,061,224.00

12.49

$874,636.00

$4,813,411.00

DB

5

$2,186,589.00

8.92

$624,740.00

$5,438,151.00

SL

6

$1,561,849.00

8.92

$624,740.00

$6,062,890.00

SL

7

$937,110.00

8.92

$624,740.00

$6,687,630.00

SL

8

$312,370.00

4.46

$312,370.00

$7,000,000.00

SL

The diverse with MACRS is that the company encounters huge depreciation deductions in year 1, year 2, year 3, and year4, then a small reduction in the other few years. According to Khandanova (2013), MACRS encompass full depreciation of available assets in the organization.

Risks Associated with the Investment

The XYZ Company seems to be risky for the first 3-years since it will not incur any profit until the fourth year. However, if anything emerges within those 3-years, the results will be a poor decision regarding the investment. Not until the eighth year will the actual cost of $7,000,000 required for equipment will be made up. The other significant information to be utilized when finding out the risk of new production facilities will be the real income statement, balance sheet, and statement of cash flows. However, it is an indication of how strong the financial status of the company is to enhance its expansion (Noreen, Brewer, & Garrison, 2014). The organization is making huge losses for the first three years exposing the risk of the company to expand into two new products together with investing in a production facility.

Rate of Return on Investment and Net Present Value

According to the first Appendix (Appendix A), the cash flow projected takes the cash flow 12% minus the initial investment. Regarding the needed rate of return on the investment, when the investment is subtracted from the discounted cash flow, the amount would be -$50,8883.10. However, altering the return on the investment required to 10% will make the investment amount subtracted from the discount cash flow to be $1,025,581.87.

Conclusion

At the moment, the net income forecasted indicates that product A and product B will be a considerable investment after ten years. The enormous risk will exist only in the first four years; then the following 3-years will be somehow risky since the profit makes up the investment. However, putting into consideration the forecast of the cash flows and 12% needed investment rate will lead to reduced investment. Maintaining $7,000,000, the initial investment, but changing to 10-percent of the required investment would lead to a Present Net Value of $1,025,581.87 when considering ten years. This way, there will be a considerable impact on the cash flow to pursue the new production project with the two new products.

References

Horcher, K. A. (2011). Essentials of financial risk management (Vol. 32). John Wiley & Sons.

Khindanova, I. (2013). A Monte Carlo model of a wind power generation investment. Journal of applied business and economics, 15(1), 94-106.

Marshall, D., McManus, W., & Viele, D. (2017). Accounting: What the numbers mean (11th ed.). New York, NY: McGraw-Hill Education.

Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers. New York: McGraw-Hill/Irwin.