Objective of the Paper
The objective of this report is to help the CEO of ABC Company to decide whether the new project should be implemented and how that can be afforded by providing details about the estimated costs and returns. This executive level report is aimed to help the CEO’s in making internal decision. It reports the viability of the projects potential to become profitable for the company and its strategic objective.
In order to gauze the financial ability and soundness of the firm, some fundamental analysis of the firm’s financial statements, income statement, balance sheet etc. is conducted. In addition to the existing process, the new project is added here and a thorough analysis is done to get the final result to conclude the decision making about the acceptance of the new project. The report is prepared to provide some important and analytical information regarding the expansion project.
Summary of Findings
ABC Company specializes in making cedar roofing and siding shingles. Different risk factors are present for the ABC Co and economy is also sluggish. The main source of cash flow for the firm is the operating cash flow (especially net income). But this can be improved by investing in income earnings securities. The project needs additional financing. The NPV of the investment project is negative so the CEO should not make the investment. But if it can reduce the production cost, ABC can go for it because it will fulfill the target growth rate. Part I
The Big Picture of Risk Profile
Current economic and industry issues: Risk is everywhere. Different kinds of risks may arise from the economic and industry conditions in an economy. For a manufacturing company like ABC Co., many economic and industry risk factors can hurt its business. Some of these factors can include but not limited to the following- ? Existing or new competitors may take the same advantage by learning and copying ABC’ production process.
? Adverse economic movement may hamper the production process for the new product
? A hike in the price of raw materials needed
? New product with highly time intensive nature can lead to delay in the deadlines for construction
? Political risk that arises from dramatic change in the political regime
? Threats can arise from any of the five forces of Porter’s five forces model. Such forces are rivalry among existing firms, threats of new entrants, bargaining power of buyers, bargaining power of suppliers and threat of substitute products or services.
? Potential loss of key personnel, sourly relationship of the firm with its labor Union
? Other operational losses can occur because a heavy natural disaster can threat the company, its operations, and its business severely
Recent available information shows that the USA economy is still in downturn, although it has started to recover. The production of new and existing sustainable products still has not catch up its previous tandem. The country is running a trade deficit and is also engaged in selling off assets and taking on massive debts to sustain standard of living. The international competitors are to capture the market share due to globalization. As a consequence USA firms may lose domestic market share, self-sufficiency, and leverage. The US manufacturers are enticed to design, engineer and produce in the third world markets like Mexico and China for pursuit of achieving low cost advantage. Part II
Current Company Cash Flow
Sources and uses of the company’s Cash Flows: Cash Flow statement of ABC co.’s can be segregated into cash receipts and cash payments of three broad categories as follows- operating cash flow, investing cash flow and financing cash flow. Calculation demonstrates that the ABC co. generated a cash flow from operations of about $27,000 in year 19X2, when reported income after tax was $12,000. The...