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MBA FPX 5010 Assessment 4
Expansion Recommendation
An expansion recommendation analyses the possibility and gain from the continuation as well as the launching of new processes in the operation of a firm. The purpose of the evaluation is to analyze the financial information, the possible risks, and the potential profit of investing in the XYZ brand expansion plan.
Analysis of Financial Statements
The records of the financial statements of ZXY Company reveal the values of the significant dollar parameters, including the revenue. Through the preparation of this strategic evaluation and forecast, it is endearing to achieve a well-informed financial status as well as a multitude of opportunities for the intended expansion of the company.
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Gross Profit Examination
Editorially, the study strongly supports expansion since the first year’s gross profit was $ 583,040, and the gross profit was $ 33,164,007 over the next ten years. Analyzing the data presented over more than ten years, the increase in gross profit has the same constant tendency that points to relatively high gross profit and the main idea of profitability (CFI, 2023). The sign of interaction of gross profit margin means that the expansion is feasible and could yield handsome returns for the organization, thus making it financially sound to pursue the expansion.
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Net Income Review
Even though there is a net loss of ($73,357) in the first year primarily because of certain fixed and wiring costs, which are the initial outlay expenses, the 10-year generation of projected income of $17,339,027 is proof enough sustainability to bring in more expansions (CFI, 2023b).
Admittedly, concentrating on the early phase of the venture’s development may provide a negative picture, yet focusing on the long-term development path makes it possible to notice the upward trend toward profitability, meaning the potential for massive profits in the future.
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Cash Flow Analysis
The accurate depiction of negative cash flow in the first year ($42,733) by primarily start-up expenses opposes the projected total cash flow for ten years as the critical aspect of the expansion’s sustainability ($17,339,027). Although the first year has a negative cash balance, the long-term prediction reflects the positive cash flow according to the positive net income trend.
It means that the cost is first if there is sufficient evidence that the price can, in the end, result in its expansion’s financial viability (Loth, 2023). Prudent management of cash resources and finances, as well as efficient use of organs in the next ten years, will be crucial in generating positive cash flows.
Potential Risks
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Market Risk
Market risk is one of the most significant areas; it reflects the primary uncertainty of the market and an option for the unpredictable change of the economy (Tamplin, 2023).
For instance, if the organization is ZXY Company operating in a niche industry vulnerable to issues of economic cycles, a market risk might mean reduced customer interest in its goods or services. This variation could significantly affect revenues and thus cut the company’s profitability, generating riskier investments than planned.
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Operational Risk
The other important aspect that needs to be discussed is the operational risk, which means the essential workflow discrepancies within the framework of the selected company (Chapelle, 2019).
For instance, if the supply chain management of ZXY Company mainly depends on a particular supplier for a specific component, then problems faced by that supplier may lead to operational risks such as production hold. Such an occurrence can lead to increased levels of spending on the production of their products and poor product quality.
Situations like regulatory shifts that may affect ZXY Company by placing more stringent environmental requirements on the organization may compel the company to alter its operations to meet new standards, which translates to added expenses.
For instance, an increase in import taxes on some of the primary raw materials that ZXY Company uses will increase the manufacturing costs, thus lowering the profit margin.
As mentioned earlier, this investment has a risk factor; nevertheless, the risk is low. Procedures should be precisely accurate so that they can be easily related to the actual revenue and expenditures, which will present sound monetary decisions.
Slight deviations from the projections used can primarily affect the future yields of the investment. Also, the change from straight-line depreciation to MACRS will mean a shift in the schedule of tax deductions and, consequently, modify the cash flows linked to the investment (GoCardless, 2020).
Recommended Course of Action
From the other detailed facts, it can be concluded that in the context of ZXY Company’s development, priority should be given to the development of products and equipment. The recommendation is accompanied by financial analysis and an unspecified growth in the values of revenues and costs, gross profit, expenditures, net income, and cash flow (Tim Vipond, 2022).
From projections made in the past, it is seen that the growth of revenue for both products will remain stable in the future. Yearly sales revenue for Product A is expected to increase to $3,900,000 and Product B to $5,500,000 by year 7, depicting the market demands as well as a high growth rate.
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Even though the business’s Year 1 income statement shows a $73,357 deficit, the company’s net income will grow to $4,385,039 in Year 10. Looking at the overall revenue growth, it is evident that the company has a probability of long-term profitability (ClearTax, 2021).
A positive cash flow is expected over ten years for the expansion that the planners intend to undertake. Bearing in mind some differences between them, it can be stated that the cash flow seems to afford to support the given expansion scenario.
The contemplated expansion program calls for an investment of $7,000,000, at the end of which the carrying value of the undertaking is expected to be $1,000,000. Analyzing the outstanding results of the financial ratios criteria, we have every reason to expect that ten years’ investment return would prove to be positive. In relation to expansion, the estimated NPV is $3,985,000, which will justify the decision to venture on the expansion.
Besides, according to the ROI study, the approximate net profit of the development project is around 12%, resulting in a high return. In light of the above work carried out and especially noting the optimistic financial forecasts such as NPV and future profitability, the expansion project should be carried out as proposed (ClearTax, 2021).
Financial Criteria Support
The ROI is another tool employed in evaluating the economic value of a project and the feasibility of the business venture (Birken, 2022). The expansion project has a positive NPV, which illustrates that the financial inflow is more significant than the outflows for the next ten years.
Interestingly, while the business’s net cash flow starts in the red in Year 1 on account of initial start-up costs, the business’s projected net cash flow for the expansion period, in fact, stands at $17,339,027. The net of these figures is a positive NPV, and this shows that the project can facilitate an ROI and achieve financial objectives (Birken, 2022).
The projected ten-year increase in revenue is $56,840,000, which proves that there is a high customer interest in the new items, which has become a solid motivating factor for the expansion. For instance, the sales forecast for Product A will be 34,640,000, and that of Product B will be 22,200,000. This trend in income increase points to the fact that the expansion indeed coincides with the market and meets the customers’ needs.
MBA FPX 5010 Assessment 4 Expansion Recommendation
Below is the projection of gross profit over the 10-year horizon, which also predicts the project’s ability to continue to generate good profits. As far as the financial ratios of the period, one of the critical gauges, the gross profit, equal to $583,04,0, was attained in spite of some difficulties, and it may grow in the subsequent years and outline the profit margins and sustainable funds sources.
Finally, an analysis based on the cash flow requirement shows that the company’s cash flow was slightly negative in the first year,r primarily because of startup costs. The NPV figures reflect a positive figure, which is tabulated below and side by side; this highlights that initial investment in the expansion venture is recoverable over a period, boosting the financial sustainability of the expansion venture (Birken, 2022).
Conclusion
Thus, after analyzing the financial interests and the occurrence of possible risks, the recommendation is to proceed with the strategy of ZXY Company’s further expansion. The justification for the current projected expansion and the expected future returns align with the positive financial ratios such as NPV, growth estimates for revenues, profit margins, and Q, and healthy future cash flows over ten years.
Nonetheless, it is crucial in the case of the growth initiative to continue tracking risks, market conditions, and other operational matters so that the initiative can sustain its growth.
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MBA FPX 5010 Assessment 3 Environmental Analysis
References
Birken, E. G. (2022, September 28). Understanding return on investment (ROI) (B. Curry, Ed.). Forbes Advisor; Forbes.
https://www.forbes.com/advisor/investing/roi-return-on-investment/
Calzon, B. (2019, March 20). The importance of financial reporting and analysis: Your essential guide. BI Blog | Data Visualization & Analytics Blog | Datapine.
https://www.datapine.com/blog/financial-reporting-and-analysis/
CFI. (2023a). Cost of Goods Sold (COGS). Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/accounting/cost-of-goods-sold-cogs/
CFI. (2023b). Net income. Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/accounting/what-is-net-income/
Chapelle, A. (2019). Operational risk management. Online Library.
https://doi.org/10.1002/9781119548997
ClearTax. (2021, September 4). NPV (Net Present Value) – Formula, meaning & calculator. Cleartax.in; ClearTax.
https://cleartax.in/s/npv-net-present-value
GoCardless. (2020). What Is MACRS Depreciation? Gocardless.com.
https://gocardless.com/en-us/guides/posts/what-is-macrs-depreciation/
Leisen, R., Steffen, B., & Weber, C. (2019). Regulatory risk and the resilience of new sustainable business models in the energy sector. Journal of Cleaner Production, 219, 865–878.
https://doi.org/10.1016/j.jclepro.2019.01.330
Loth, R. (2023, April 4). Analyze cash flow the easy way. Investopedia.
https://www.investopedia.com/articles/stocks/07/easycashflow.asp
Tamplin, T. (2023). Market risk | Definition, importance, types, & strategies. Finance Strategist.
https://www.financestrategists.com/wealth-management/investment-risk/market-risk/
Tim Vipond. (2022, December 5). Analysis of financial statements. Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/accounting/analysis-of-financial-statements
