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Summary MBA FPX 5010-4th assessment 1st attempt.docx MBS-FPX-5010 Capella University MBS-FPX-5010 Expansion Recommendation Recommendation for Expansion XYZ Firm is a food product company that wants to grow by releasing two new items and renting a new $7.49
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Summary MBA FPX 5010-4th assessment 1st attempt.docx MBS-FPX-5010 Capella University MBS-FPX-5010 Expansion Recommendation Recommendation for Expansion XYZ Firm is a food product company that wants to grow by releasing two new items and renting a new
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MBA FPX 5010-4th assessment 1st MBS-FPX-5010 Capella University MBS-FPX-5010 Expansion Recommendation Recommendation for Expansion XYZ Firm is a food product company that wants to grow by releasing two new items and renting a new production facility. They plan to do so by equipment exp...
mba fpx 5010 4th assessment 1st attemptdocx mbs fpx 5010 capella university mbs fpx 5010 expansion recommendation recommendation for expansion xyz firm is a food product company that want
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MBS-FPX-5010
Capella University
MBS-FPX-5010
Expansion Recommendation
Recommendation for Expansion
XYZ Firm is a food product company that wants to grow by releasing two new items and renting
a new production facility. They plan to do so by equipment expenses of $7,000,000 are required.
This equipment is expected to last ten years, after which it and other assets can be sold for
$1,000,000. The XYZ Company requires a return on investment of 12%. Based on this
information and their projected financial accounts, I will make a recommendation. My
recommendation will determine whether I will make an investment into the organization or not.
Analysis of Income Predictions
Revenue and growth forecasts will be most trustworthy if the inputs used to calculate them are as
precise as possible. Analysts use data from the firm, the industry, and consumers to anticipate
revenue. Companies and industry trade groups frequently publish information on the market's
potential size, number of rivals, and present market shares. Annual reports and industry
associations might provide this information. Buyer surveys, UPC bar coding, and other sources
of consumer data offer a picture of present and future predicted demand, (Zucchi, 2019).
According to the projected income statement, the firm would lose money each year for the first
three years if it exclusively produces Product A. When Product B is added in year three, a profit
will start to appear. Until the end of the accounting period, that profit will grow each year. After
10 years, Product A and Product B are expected to generate $56,840,000 in revenue. After ten
years, the predicted cost of products sold is $23,675,993, resulting in a predicted gross profit of
$33,164,007 The overall expenditure are expected to stay constant throughout the course of the
term, totaling $5,374,724.
Explain risks associated with an investment decision
XYZ Company will lose money during the first three years of the investment. When Product B
begins manufacturing in the fourth year, the firm will begin to make a profit. If something goes
wrong in those initial years, the firm won't be able to recover since it won't have the earnings or
cash flow to do so. According to the MACR graph, the $7,000,000 needed for equipment will not
be recouped until the eighth year, (Appendix B). The expected cash flows are calculated using
Net Present Value. To get a 12 percent return, multiply the cash flow from years 1 through 10 by
the applicable table factor. Add up the totals for each year, then subtract the total from the $7
million starting investment. As shown in Appendix C, the discounted cash flow minus the initial
investment at a 12 percent needed rate of return is a negative $160,033. A positive net present
value (NPV) implies a profitable investment. A positive NPV will result in a net loss, whereas a
, negative NPV will result in a net loss. According to the Net Present Value Rule, this is a high-
risk investment that should be avoided since only investments with positive NPV values produce
If they do not want to decrease the required return from the initial 12% then they would need to
reevaluate a way to introduce Product B into production earlier than year 3 to increase cash flow earlier in
the process.money for investors (Kenton, W 2019).
Methods of Depreciation
The original cost, the value after its useful life, and the number of years in the equipment's
existence are all taken into consideration with straight line depreciation. The XYZ Company’s
straight-line depreciation estimate would be $7,000,000 – 6,000,000 /10 or $600,000 taking
$600,000 out of the company's net profits each year. Appendix A shows XYZ's complete 10-year
straight line depreciation. Appendix B shows the modified accelerated cost recovery system
(MACRS) 8-year depreciation schedule. The capitalized cost of an asset is recovered over a set
period of time through annual deductions, allowing for higher depreciation deductions in the first
four years and smaller deductions in the last few years. This enables for the whole depreciation
to take place in fewer years, allowing the corporation to keep more earnings in the last few years.
Assumption
When merely looking at the ultimate figures and projected net income, the expansion appears to
be a good investment, but it would take ten years to get there. Because it takes many years for a
new firm to become successful, the risk is greatest during the first four years. The amount of
start-up capital required to manufacture the products, as well as how much money is taken from
the firm for compensation and investor service, determines how long it takes to reach profitable.
Using the projected income and assuming a 12 percent return on investment, I advise XYZ
Corporation not to proceed with this expansion.
Recommend a course of action based on financial information
The calculations show that with the expected cash flows and the needed investment rate of 12
percent, the investment is unfavorable. If XYZ wishes to expand sooner rather than later, I would
advise them to preserve the $7,000,000 initial investment but reduce the needed rate of investment
by 1 or 2 percentage point. Appendix D demonstrates that a ten percent rate would result in a Net
Present Value of $1,021,156, which would be sufficient to undertake the new manufacturing
project. If they don't want to reduce the needed return from the initial 12 percent, they'll have to
rethink how to get Product B into production faster than year 3 in order to boost cash flow sooner
in the process. Because product B has a greater profit growth rate over a shorter period of time,
delaying manufacturing until year three hurts earnings. By altering the manufacturing plan, they
may be able to forecast a positive cash flow and profit sooner.
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