Investment Proposals Analysis
ABC Corporation has just developed a smart drone technology, which uses sensors and blockchain technology to monitor crop health, and spray ailing crops with pesticides and fertilizers according to crop condition. The company is planning to begin production on this smart drone and go to market with this new technology.Feasibility studies have been made to determine probable costs and market potential for the smart drone. These studies have provided the following information a Facilities would have to be built to produce the smart drone. The facilities would cost $30 million. and has a 10-years useful life. After 10 years, it would have a salvage value of about $2 million.
b Sales in units over the next 10 years are projected to be as follows:
Year Sales in UNITS (per annum)
1 to 5 500
6 to 10 900
c Production and sales of the drone would require working capital of $200,000 to finance accounts receivable,inventories, and day-to-day cash needs. This working capital would be released at the end of the project’s life.
d The drone would sell for $15 000 each.
e Fixed costs for salaries, maintenance, property taxes, and insurance on the equipment would total
$1 million per year. Variable costs of production would be $500 per unit
f To gain rapid entry into the market, the company would have to advertise heavily. The projected
marketing expenses would be:
Year Marketing Expenses (per annum)
1 to 3 $400,000
4 to 10 $200,000
g The company’s depreciation policy is straight line method over the asset’s useful life. ABC Corporation pays a corporate tax rate of 23%. ABC Corporation’s board of directors has specified a required rate of return of 15% on this project.
ABC Corporation has a major shareholding in XYZ, a fertilizer supplier On January 2, 2020, XYZ is attempting to budget cash flows through February 28, 2020. On this latter date, an unsecured note will be payable in the amount of $200,000. This amount was borrowed in November to carry the company through the seasonal peak in December and January.Selected balances from XYZ’s book of accounts on January 2 are:
Cash Accounts Payable
$300 000 $220 000
The company estimates that approximately 50% of the sales will be for cash, and the rest will be on credit Of the credit sales, 20% of the money will be received in the month of sale. 40% will be collected in the following month, and 38% will be received 2 months after sale. Approximately 2% of credit sales are never collected and are written off.
The average selling price of the company’s products is $90 per ton. Actual and projected sales are:
November (actual) $ 1 850 000
December (actual) $ 1 600 000
January (estimated) $ 1 400 000
February (estimated) $ 1 850 000
March (estimated) $ 1 600 000
Purchases are made on basis of 70% the following month’s projected sales quantity. All purchases are payable within 30 days. Approximately 70% of the purchases in a month are paid that month and the rest the following month. The average cost is $60 per ton. Total budgeted marketing, distribution, and customer-service costs for the year are $3 000 000. Of this amount, $120 000 are considered fixed (and include depreciation of $80 000). Fixed costs are accrued evenly through the year.The remaining variable costs ($10 per unit) with accrued evenly with unit sales. Both fixed and variable costs are paid in the month incurred.
you will be required to write a management report to the board of ABC Corporation in which the following points should be discussed.Analyse the Investment proposals by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that ABC may use, and the limitations of using those techniques.Provide an explanation on the different sources of funding available to the company, and their advantages and to the planned investment project.
The use of management tools such as Breakeven analysis and Budgets. A computation of your breakeven analysis should be computed for the drone project. The cash budget should be prepared for December 2019 and January 2020 An evaluation of XYZ’s cash position over the budgeting period.A detailed Literature Review of the tools you have used such as capital investment techniques, breakeven analysis and budgets and their importance to the business case.Other issues for management to consider that you think are vital for them to survive and make a profit.
Assignments should not be copied in part or in whole from any other source, except for any marked up quotations, that clearly distinguish what has been quoted from your own work. All references used must be given, and the specific page number used should also be given for any direct quotations, which should be in inverted commas. Students found copying from the Internet or other sources will get zero marks and may be excluded from the university. Word Count –Any work submitted with more than 2500 words will be have 10 marks deducted.