Question:
Please note that there two parts to this question
Shared Activity: Assessing the Use of Financial Data in Strategic Decision-Making
This unit's resources describe the ways in which timely and accurate financial data provide a powerful tool for managers to use in the decision-making process. Strategic decisions can particularly benefit. For example, an organisation may be faced with a decision regarding expansion. Sometimes, ‘expansion' refers to an expanded product offering (something being considered by Anthony's Orchard, as you will explore in this unit's Individual Assignment). Expansion can also refer to expansion of sales into new customer markets, or to physical expansion, by opening additional facilities.
BLC Inc. is a medium-sized manufacturing company based in the UK. The company operates mainly in the London area and is based in Peterborough. At a recent board meeting, the company decided to expand its activities, and to lease additional temporary premises in London in order to cope with additional demand.
In this unit, you will analyse data related to anticipated cash flows resulting from BLC's expansion to either of two potential new premises. Your group will collaborate to make a recommendation.
To prepare for this Shared Activity:
- Review the financial data below. The company has narrowed the choice to the following two alternatives, with the following cash flow information being available.
- Use the following data in your analysis:
|
Year
|
Property 1
$(000s)
|
Property 2
$(000s)
|
|
0
|
(2,500)
|
(2,750)
|
|
1
|
1,000
|
900
|
|
2
|
500
|
700
|
|
3
|
600
|
800
|
|
4
|
1,000
|
600
|
|
5
|
900
|
600
|
Note 1: The company's current cost of capital is 10%.
Note 2: Ignore taxation.
To complete this Shared Activity:
- Post an explanation of the tools that you believe would help you to reach a decision. If you were a decision-maker in this organisation, which calculations and measures would you want at your disposal before making your choice? Are there other, non-financial factors that may play a role in your decision? Additionally, include your recommendation to the company which option it should take. Support your decision with an interpretation of any calculations you performed, as well as an explanation of any other factors you considered
READINGS TO USE AS REFERENCE
Atrill, P., & E. McLaney, (2011)Accounting and Finance for Non-Specialists, 7th edition, Harlow: FT/Prentice Hall
- Chapter 10: 'Making Capital Investment Decisions' (pp.355-401)
- Chapter 11: 'Financing a Business' (pp.402-452)
These chapters focus on financial management. They examine how businesses can make decisions involving investments in new plant, machinery, buildings and other long-term assets. Also examined are the various aspects of financing a business.
Emmanuel, C., E. Harris, & S. Komakech, (2010) 'Towards a Better Understanding of Capital Investment Decisions', Journal of Accounting and Organizational Change, 6 (4) pp.477-504.
This paper examines the capital investment process, guided by concepts from cognitive and social psychology. The intention is to gauge the extent to which managerial judgement can be detected by applying a psychological lens to the process.
OPTIONAL
Lockett, A., J. Moon, & W. Visser, (2006) 'Corporate Social Responsibility in Management Research: Focus, Nature, Salience and Sources of Influence',Journal of Management Studies, 43, pp.115-136
MEDIA READINGS
Laureate Education, Inc., (2012a)Anthony's Orchard Case Study, [Media], Baltimore: Laureate Education, Inc.
Anthony's Orchard is the case study organisation that you will use throughout this module. Note the financial data and other information presented here
Laureate Education, Inc., (2012c)Interview with Anthony's Orchard CFO Mary Scott, [Media], Baltimore: Laureate Education, Inc.
Anthony's Orchard Chief Financial Officer Mary Scott discusses a potential expansion of the company's product line and the purchase of equipment required for that expansion. This discussion will provide some insight that will help you as you analyse data in order to make a recommendation to the company as part of the Individual Assignment for this unit, as well as for the Final Project for the module
Individual Assignment: Analysis of the Investment
In the Shared Activity for this unit, you analysed projected financial data and assessed its value to making a physical expansion decision. As you have heard in the media presentation from CFO Mary Scott, Anthony's Orchard is faced with another type of expansion decision. CEO Bob Frost is eager to expand the product line to include apple juice.
Of course, a decision to expand a product line has very many variables. In this assignment, you will focus on one of these: the additional cost resulting from the purchase of an apple press (a piece of equipment required to manufacture apple juice). You also will investigate the value of a number of financial measurements. Ultimately, you will develop a recommendation for the company, and this analysis will help you to support that recommendation.
To prepare for this Individual Assignment:
Review the Anthony's Orchard case study in the unit resources.
Consider the following:
- The company, according to Anthony's Orchard Strategic Plan, is hoping to purchase an apple press in order to start a new line of prepared apple products-apple juice.
- The company estimates this new product offering will generate an additional $95,000 net income per year and estimated cash flows of $90,000 per year. The cost of the apple press will be $950,000 and this expenditure, as shown in the budgeted cash flow statement, is expected to take place in the fourth quarter of 2012.
- The apple press is expected to have a seven-year life and no salvage value.
- The company requires a 10% return on investment for new capital investments and the company uses a cost of capital of 8%.
- The company's revenue goal for 2015 is $25 million.
- Assume a minimum 12% gross margin on revenue.
To complete this Individual Assignment, answer the following:
- Do you think the company's revenue goal of $25 million by 2015 is realistic?
- Explain how purchase of the apple press might affect the company's revenue goals. Based on this information, explain whether Anthony's Orchard should invest in the apple press. Support your response with relevant information provided in the case study, the previous year's financials for 2010, the current year's financials for 2011 and the budgeted year's financials for 2012.
- Draft budgeted financial statements from 2012 to 2015 under both options that provide a realistic assessment of expected revenues and costs, and explain how you have arrived at these budgeted figures.
Notes:
You should fully state and justify any assumptions that you make in relation to the financial data you use. Be sure to include all references as well.
This Individual Assignment forms the basis of Section 2 of your Final Project. You will receive feedback on this work from your Faculty Member, and will be expected to incorporate any suggestions into the Final Project.
Your submission should be 1,000 words (+/- 10%) in length