Rich Confectionaries Company Case Study

Question: Discuss about theRich Confectionaries Company Case Study. Answer: Introduction Incremental Cash flow Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 cash inflows 5,100,000 5,100,000 6,750,000 6,750,000 9,500,000 9,500,000 9,500,000 9,500,000 9,500,000 9,500,000 less cash outflow Marketing Expenses 487,500 487,500 387,000 387,000 153,000 153,000 153,000 153,000 153,000 153,000 Variable costs 3,540,000 3,540,000 4,200,000 4,200,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 lease 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 325,000 Depreciation 320,000 320,000 320,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 Other expenses 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 Taxes 38,250 38,250 365,400 365,400 1,035,600 1,035,600 1,035,600 1,035,600 1,035,600 1,035,600 Net Cash Flow 89,250 89,250 902,600 902,600 2,416,400 2,416,400 2,416,400 2,416,400 2,416,400 2,416,400 Discounting Factor 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472 Present value 77,612 67,482 593,460 516,107 1,201,434 1,044,610 908,325 789,921 686,983 597,297 Rich Confectionaries should expand their operations. It has been in operation for a very long time meaning it has gained a substantial number of loyal customers. Due to this, they should lease the nearby factory in an attempt to expand their operations. The location of the new factory should be near the main factory so as to reduce transportation and relocation costs. It will also aid in sharing of employees between the two factories thus assist in labor and experience. From the estimations in Appendix 1 it is assumed that the expansion will require new equipment which will be responsible for making chocolate bars. The equipment is estimated to cost about 3 million together with its installation costs. However, the new equipment will boost the overall production of the business. It is expected to double up their yearly output in units from 50,000 units to 100,000 units. In order to maintain their loyal customers, they should reduce the price per unit and take advantage of economies of scale (Mohnen et al, 2007). The current cost is stated at $80 but with a price of $65 the company will still realize a substantial amount of profit. The large scale operation will reduce the overall overhead costs incurred by 30% in terms of fixed and variable costs. The current overheads stand at around $5,000,000. The new factory overheads will be around $3,500,000. With such the payback period of the expected expansion will be: = 1 year Payback period is the time taken by a business to recover its initial capital investment through the cash income it generates from its activities. In case of two projects the project with the shortest period is accepted. It is determined by dividing the amount of capital investment by the projected cash inflow of the project (Juhsz, 2011). Businesses are advised to use payback periods since it is easy to compute and understand. It also allows business managers to make decisions based on the liquidity of the investment at hand. It is also important for companies with limited cash for investments thus the need to know projects with short payback so as to recover their cash quickly. However, during the computation of payback period it ignores the time value of money. Payback period also emphasizes on liquidity aspects of a project other than its profitability. It ignores the cash inflow that occurs after the payback period. This nullifies the importance of pay-back period. Rich Confectionaries should undertake a performance appraisal of the investment project in an aim to obtain the most benefits out of the costs incurred. The company should consider the legality of their intended expansion. The expansions impact on the environment should also b considered (Bidard, 1999). The return on investment expected could be measured in terms of quality of life improvement and saving lives of members of the adjacent community. It should also lead to competitive advantage, improved customer satisfaction and employee morale. The associated risks should be well calculated to avoid future losses. The expansion should improve the capabilities of the business in terms of experience and improving the management systems. It should meet and match the qualities set by the industry. References Bidard, C. (1999). Fixed capital and internal rate of return.Journal Of Mathematical Economics,31(4), 523-541. https://dx.doi.org/10.1016/s0304-4068(97)00062-1 Juhsz, L. (2011). Net Present Value Versus Internal Rate Of Return.Economics Sociology,4(1), 46-53. https://dx.doi.org/10.14254/2071-789x.2011/4-1/5 Martin, R. Internal Rate Of Return Revisited.SSRN Electronic Journal. https://dx.doi.org/10.2139/ssrn.39520 Mohnen, A. Bareket, M. (2007). Performance measurement for investment decisions under capital constraints.Rev Acc Stud,12(1), 1-22. https://dx.doi.org/10.1007/s11142-006-9020-1