Interpret financial decision-making criteria. Student Success Criteria View the grading rubric for this deliverable by selecting the This item is graded with a rubric?

10 Jul Interpret financial decision-making criteria. Student Success Criteria View the grading rubric for this deliverable by selecting the This item is graded with a rubric?

Posted at 14:24h in Business & Finance /Operations Management by

Assignment Content

Competency
Interpret financial decision-making criteria.
Student Success Criteria
View the grading rubric for this deliverable by selecting the “This item is graded with a rubric” link, which is located in the Details & Information pane.

Scenario
You are an operations manager for New Foods Company. The company manufactures organic versions of common food items, such as cookies and bread. New Foods has built a reputation for good taste and quality in its products and has developed partnerships with several health food retailers. An opportunity exists to expand into a traditional grocery store chain with a new partnership. This opportunity will require increased production. However, your firm has not previously sold its products in this channel and uncertainty exists about the volume of new product sales that may result.

The executive leadership team of New Foods Company wants to grow the firm and it has been working with the local government on potential tax credits for creating new jobs in the area. The leadership team has also identified a commercial bank that will provide loans for any plant and equipment purchases. An overarching goal of the leadership team is to maintain product quality and the brand’s reputation.

Three options for increasing production have been identified.
- The first option is to purchase and refurbish a manufacturing plant location in a nearby town that has been closed for several years. Equipment to operate this plant would also have to be acquired. The location is large enough to build production for the expected volume and have excess space to accommodate growth of 200% in the future. This refurbished location could be operational in 12 months.
- The second option is to lease capacity from another food manufacturing firm that does not make its own branded products but operates as a co-manufacturer for others. This firm currently has enough available capacity for the expected volume, but not to increase above that level. This production process could be operational in 3 months.
- The third option is to expand your existing plant location by purchasing adjacent land and constructing a new building. Equipment to operate this expansion would also have to be acquired. The land is large enough to build production for the expected volume and have excess space to accommodate growth of 50% in the future. This new location could be operational in 18 months.
- Instructions
  Using the financial data provided in the Excel file, calculate a net present value, internal rate of return, and payback period for each option.
  Prepare a PowerPoint presentation that summarizes the calculated results from the financial analysis and provides the key operational and strategic points for each option. One slide must be a ranked list of the three project options. Include a justification of which financial metrics and non-financial data were prioritized for ranking the three options.
  
  Submit the Excel file with the completed calculations and the PowerPoint presentation.

Summary

			Cash Flow Comparisons*			Net Present Value Comparisons
	Cash Flow	Net Present Value	vs Opt 1	vs Opt 2	vs Opt 3	vs Opt 1	vs Opt 2	vs Opt 3
Option 1 – Purchase and Renovate Plant	$ 3,297,790	$ 81,396		$ 2,136,000	$ 225,000		$ 81,396	$ 81,396
Option 2 – Lease Co-Manufacturing Capacity	$ 1,161,790	$ – 0	$ (2,136,000)		$ (1,911,000)	$ (81,396)		$ – 0
Option 3 – Expand Existing Plant Location	$ 3,072,790	$ – 0	$ (225,000)	$ 1,911,000		$ (81,396)	$ – 0

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Evaluating Capital Inv Projects

				Growth	1	2	3	4	5	5	5	5	5	5
Option 1 – Purchase and Renovate Plant		Description	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Terminal Value	Company Factors (All Options)
Start-up delay	12 months	Product sales		$ 1,150,000	$ 1,207,500	$ 1,267,875	$ 1,331,269	$ 1,397,832	$ 1,467,724	$ 1,467,724	$ 1,467,724	$ 1,467,724	$ 1,467,724		Discount rate	10%
Purchase land	$ 500,000	Product cost of sales		$ (690,000)	$ (724,500)	$ (760,725)	$ (798,761)	$ (838,699)	$ (880,634)	$ (880,634)	$ (880,634)	$ (880,634)	$ (880,634)		Income tax rate	20%
Purchase plant	$ 1,000,000	Purchase land	$ (500,000)											$ 500,000	Expected sales units (annual to yr 2)	500,000
Purchase/install equipment	$ 380,000	Purchase plant	$ (1,000,000)											$ 1,300,000	Sales unit annual growth (yrs 2-5)	5%
Renovate plant	$ 1,600,000	Renovate plant	$ (1,600,000)												Average sales price per unit to retailer	$ 2.30
Deprecation life equipment	10 years	Purchase equipment	$ (380,000)												Average contribution margin per unit	40%
Deprecation life plant	20 years	Depreciation adjustment plant		$ (130,000)	$ (130,000)	$ (130,000)	$ (130,000)	$ (130,000)	$ (130,000)	$ (130,000)	$ (130,000)	$ (130,000)	$ (130,000)	$ (1,300,000)	1) Depreciation adjustments to income tax are calculated
Capacity for current volume	300%	Depreciation adjustment equipment		$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)		on a straight-line basis for this analysis
(Current volume plus 200% growth)		Income tax	$ – 0	$ (58,400)	$ (63,000)	$ (67,830)	$ (72,902)	$ (78,227)	$ (83,818)	$ (83,818)	$ (83,818)	$ (83,818)	$ (83,818)	$ 260,000	2) Terminal values are simplified for this analysis
		Net cash flow excl depreciation	$ (3,480,000)	$ 401,600	$ 420,000	$ 439,320	$ 459,606	$ 480,906	$ 503,272	$ 503,272	$ 503,272	$ 503,272	$ 503,272	$ 2,060,000	3) Expected sales units only includes new customer;
		Rolling sum of cash flows	$ (3,480,000)	$ (3,078,400)	$ (2,658,400)	$ (2,219,080)	$ (1,759,474)	$ (1,278,568)	$ (775,296)	$ (272,024)	$ 231,247	$ 734,519	$ 1,237,790	$ 3,297,790	it does not include potential additions of other chains
										8	46%
		Net present value	$ 81,396							Use positive cash flow point
		Internal rate of return	10.4%							for payback period calculation
		Payback period in years	8.5
Option 2 – Lease Co-Manufacturing Capacity		Description	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Terminal Value
Start-up delay	3 months	Product sales	$ 862,500	$ 1,150,000	$ 1,207,500	$ 1,267,875	$ 1,331,269	$ 1,397,832	$ 1,467,724	$ 1,467,724	$ 1,467,724	$ 1,467,724	$ 1,467,724
Start-up vendor costs	$ 500,000	Product cost of sales	$ (517,500)	$ (690,000)	$ (724,500)	$ (760,725)	$ (798,761)	$ (838,699)	$ (880,634)	$ (880,634)	$ (880,634)	$ (880,634)	$ (880,634)
Monthly vendor expense	$ 30,000	Start-up vendor costs	$ (500,000)
Capacity for current volume	100%	Monthly vendor costs	$ (270,000)	$ (360,000)	$ (360,000)	$ (360,000)	$ (360,000)	$ (360,000)	$ (360,000)	$ (360,000)	$ (360,000)	$ (360,000)	$ (360,000)
(Current volume with no growth)		Income tax	$ 85,000	$ (20,000)	$ (24,600)	$ (29,430)	$ (34,502)	$ (39,827)	$ (45,418)	$ (45,418)	$ (45,418)	$ (45,418)	$ (45,418)	$ – 0
		Net cash flow	$ (340,000)	$ 80,000	$ 98,400	$ 117,720	$ 138,006	$ 159,306	$ 181,672	$ 181,672	$ 181,672	$ 181,672	$ 181,672	$ – 0
		Rolling sum of cash flows	$ (340,000)	$ (260,000)	$ (161,600)	$ (43,880)	$ 94,126	$ 253,432	$ 435,104	$ 616,776	$ 798,447	$ 980,119	$ 1,161,790	$ 1,161,790
		Net present value		Solve for
		Internal rate of return		values using
		Payback period		formulas as above
				Solve for beginning values based on start-up delay
Option 3 – Expand Existing Plant Location		Description	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Terminal Value
Start-up delay	18 months	Product sales			$ 1,207,500	$ 1,267,875	$ 1,331,269	$ 1,397,832	$ 1,467,724	$ 1,467,724	$ 1,467,724	$ 1,467,724	$ 1,467,724
Purchase land	$ 50,000	Product cost of sales			$ (724,500)	$ (760,725)	$ (798,761)	$ (838,699)	$ (880,634)	$ (880,634)	$ (880,634)	$ (880,634)	$ (880,634)
Construct plant expansion	$ 2,700,000	Purchase land	$ (50,000)											$ 50,000
Purchase/install equipment	$ 380,000	Construct plant	$ (2,700,000)											$ 1,485,000
Deprecation life equipment	10 years	Purchase equipment	$ (380,000)											$ 38,000
Deprecation life plant	20 years	Depreciation adjustment plant			$ (135,000)	$ (135,000)	$ (135,000)	$ (135,000)	$ (135,000)	$ (135,000)	$ (135,000)	$ (135,000)	$ (135,000)	$ (1,485,000)
Capacity for current volume	150%	Depreciation adjustment equipment			$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)	$ (38,000)
(Current volume plus 50% growth)		Income tax	$ – 0	$ – 0	$ (62,000)	$ (66,830)	$ (71,902)	$ (77,227)	$ (82,818)	$ (82,818)	$ (82,818)	$ (82,818)	$ (82,818)	$ 304,600
		Net cash flow excl depreciation	$ (3,130,000)	$ – 0	$ 421,000	$ 440,320	$ 460,606	$ 481,906	$ 504,272	$ 504,272	$ 504,272	$ 504,272	$ 504,272	$ 1,877,600
		Rolling sum of cash flows	$ (3,130,000)	$ (3,130,000)	$ (2,709,000)	$ (2,268,680)	$ (1,808,074)	$ (1,326,168)	$ (821,896)	$ (317,624)	$ 186,647	$ 690,919	$ 1,195,190	$ 3,072,790
		Net present value		Solve for
		Internal rate of return		values using
		Payback period		formulas as above

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Dashboard

	Company	Industry
Return on Equity	9.0%	6.8%
Return on Assets	7.5%	5.7%

Expenses as of Quarter Ending 12/31/2018

12/31/2018

Food and beverage Restaurant labor Restaurant expenses Marketing expenses General and administrative expenses 574.20000000000005 544.221 344.96550000000002 53.351999999999997 74.016000000000005

Pasta House Restaurants 42825 42916 43008 43100 43190 43281 43373 43465 924.56999999999994 890.91 856.44 965.88000000000011 961.02 946.80000000000007 898.29000000000008 1017.1800000000001 Pasta House Restaurants 42825 42916 43008 43100 43190 43281 43373 43465 719 720 722 725 728 729 729 731

Expenses 2017 – 2018 (USD in 000s)

Food and beverage 42825 42916 43008 43100 43190 43281 43373 43465 501.75 499.68000000000006 488.61 542.97 541.53000000000009 524.97 506.96999999999997 574.20000000000005 Restaurant labor 42825 42916 43008 43100 43190 43281 43373 43465 305.24220000000003 311.6961 319.51350000000002 327.96720000000005 328.96709999999985 325.33109999999999 328.14900000000006 344.96550000000002 Restaurant expenses 42825 42916 43008 43100 43190 43281 43373 43465 95.976000000000013 70.56 71.208000000000013 79.272000000000006 74.016000000000005 75.239999999999995 68.472000000000008 74.016000000000005 Marketing expenses 42825 42916 43008 43100 43190 43281 43373 43465 54.976499999999994 56.429999999999993 49.6755 50.359499999999997 59.251500000000007 56.857500000000002 49.59 53.351999999999997 General and administrative expenses 42825 42916 43008 43100 43190 43281 43373 43465 95.976000000000013 70.56 71.208000000000013 79.272000000000006 74.016000000000005 75.239999999999995 68.472000000000008 74.016000000000005 Depreciation and amortization 42825 42916 43008 43100 43190 43281 43373 43465 63.360000000000007 68.489999999999995 70.92 71.28 71.100000000000051 72.63000000000001 74.52 76.77

Expenses as of Quarter Ending 12/31/2018

12/31/2018

Food and beverage Restaurant labor Restaurant expenses Marketing expenses General and administrative expenses 574.20000000000005 544.221 344.96550000000002 53.351999999999997 74.016000000000005

Revenue

					1	2	3	4	5	6	7	8
				Revenue	3/31/17	6/30/17	9/30/17	12/31/17	3/31/18	6/30/18	9/30/18	12/31/18	Revenue	3/31/17	6/30/17	9/30/17	12/31/17	3/31/18	6/30/18	9/30/18	12/31/18
				Sales	1,754.5	1,740.5	1,691.6	1,913.6	1,900.5	1,847.9	1,769.0	2,013.8	Pasta House Restaurants	924.6	890.9	856.4	965.9	961.0	946.8	898.3	1,017.2
				Pasta House Restaurants	924.6	890.9	856.4	965.9	961.0	946.8	898.3	1,017.2
				Steak Grill Restaurants	392.9	364.1	348.9	407.5	412.4	387.4	371.3	434.9
				Breakfast To Go	128.3	142.5	139.5	148.6	150.4	152.1	137.5	150.1
				Souper Duper Kitchen	113.0	125.6	121.7	130.6	132.5	134.3	129.0	139.3
				Burgers on the Grill	74.7	83.0	96.9	115.3	101.8	88.2	101.3	120.9
				Tacos Tacos Tacos	50.9	56.5	45.9	50.9	55.1	59.3	47.5	51.8
				Sandwiches and Subs	45.8	50.9	52.7	62.2	56.7	51.1	53.3	63.5
				Drinks and Dessert	24.3	27.0	29.6	32.7	30.7	28.7	30.8	36.2
				Total	1,754.5	1,740.5	1,691.6	1,913.6	1,900.5	1,847.9	1,769.0	2,013.8
				# of Restaurants
				Pasta House Restaurants	719	720	722	725	728	729	729	731
				Steak Grill Restaurants	417	417	422	424	428	430	434	435
				Breakfast To Go	119	120	130	131	133	133	134	135
				Souper Duper Kitchen	57	58	58	60	61	62	64	66
				Burgers on the Grill	48	48	48	48	49	49	49	49
				Tacos Tacos Tacos	31	32	33	33	33	34	35	36
				Sandwiches and Subs	35	35	35	35	36	36	36	37
				Drinks and Dessert	15	16	16	16	16	16	17	17
				Total	1,441	1,446	1,464	1,472	1,484	1,489	1,498	1,506
				Average revenue per restaurant
				Pasta House Restaurants	1.3	1.2	1.2	1.3	1.3	1.3	1.2	1.4
				Steak Grill Restaurants	0.9	0.9	0.8	1.0	1.0	0.9	0.9	1.0
				Breakfast To Go	1.1	1.2	1.1	1.1	1.1	1.1	1.0	1.1
				Souper Duper Kitchen	2.0	2.2	2.1	2.2	2.2	2.2	2.0	2.1
				Burgers on the Grill	1.6	1.7	2.0	2.4	2.1	1.8	2.1	2.5
				Tacos Tacos Tacos	1.6	1.8	1.4	1.5	1.7	1.7	1.4	1.4
				Sandwiches and Subs	1.3	1.5	1.5	1.8	1.6	1.4	1.5	1.7
				Drinks and Dessert	1.6	1.7	1.9	2.0	1.9	1.8	1.8	2.1
				Total	11	12	12	13	13	12	12	13
	12/31/18	12/31/18	F / (U)
Revenue	Actuals	Budget	Variance	Var %
Pasta House Restaurants	1,017.2	996.8	20.3	2.0%
Steak Grill Restaurants	434.9	421.8	13.0	3.1%
Breakfast To Go	150.1	130.0	20.1	15.5%
Souper Duper Kitchen	139.3	143.5	(4.2)	-2.9%
Burgers on the Grill	120.9	96.7	24.2	25.0%
Tacos Tacos Tacos	51.8	56.9	(5.2)	-9.1%
Sandwiches and Subs	63.5	63.4	0.1	0.2%
Drinks and Dessert	36.2	37.0	(0.8)	-2.2%
Total	2,013.8	1,946.2	67.6	3.5%

Revenue for Quarter Ending 12/31/2018

Pasta House Restaurants Steak Grill Restaurants Breakfast To Go Souper Duper Kitchen Burgers on the Grill Tacos Tacos Tacos Sandwiches and Subs Drinks and Dessert 924.56999999999994 392.94000000000005 128.25 113.03999999999999 74.7 50.85 45.81 24.3

Revenue by Quarter – All Restaurants

Sales 42825 42916 43008 43100 43190 43281 43373 43465 1754.4599999999998 1740.5100000000002 1691.6400000000003 1913.58 1900.53 1847.8799999999999 1768.95 2013.84

Expense

	1	2	3	4	5	6	7	8
Expense	3/31/17	6/30/17	9/30/17	12/31/17	3/31/18	6/30/18	9/30/18	12/31/18
Food and beverage	501.8	499.7	488.6	543.0	541.5	525.0	507.0	574.2
Restaurant labor	305.2	311.7	319.5	328.0	329.0	325.3	328.1	345.0
Restaurant expenses	96.0	70.6	71.2	79.3	74.0	75.2	68.5	74.0
Marketing expenses	55.0	56.4	49.7	50.4	59.3	56.9	49.6	53.4
General and administrative expenses	96.0	70.6	71.2	79.3	74.0	75.2	68.5	74.0
Depreciation and amortization	63.4	68.5	70.9	71.3	71.1	72.6	74.5	76.8
	Expense	12/31/18
	Food and beverage	574.2
	Restaurant labor	544.2
	Restaurant expenses	345.0
	Marketing expenses	53.4
	General and administrative expenses	74.0
	Depreciation and amortization	76.8
					Monthly Household Budget
				Rent	1,000
				Car payment	300
				Utilities	200
				Groceries	150
				Fun	100
				Gasoline	50

12/31/2018

Food and beverage Restaurant labor Restaurant expenses Marketing expenses General and administrative expenses Depreciation and amortization 574.20000000000005 544.221 344.96550000000002 53.351999999999997 74.016000000000005 76.77

Food and beverage 42825 42916 43008 43100 43190 43281 43373 43465 501.75 499.68000000000006 488.61 542.97 541.53000000000009 524.97 506.96999999999997 574.20000000000005 Restaurant labor 42825 42916 43008 43100 43190 43281 43373 43465 305.24220000000003 311.6961 319.51350000000002 327.96720000000005 328.96709999999985 325.33109999999999 328.149000000000 06 344.96550000000002 Restaurant expenses 42825 42916 43008 43100 43190 43281 43373 43465 95.976000000000013 70.56 71.208000000000013 79.272000000000006 74.016000000000005 75.239999999999995 68.472000000000008 74.016000000000005 Marketing expenses 42825 42916 43008 43100 43190 43281 43373 43465 54.976499999999994 56.429999999999993 49.6755 50.359499999999997 59.251500000000007 56.857500000000002 49.59 53.351999999999997 General and administrative expenses 42825 42916 43008 43100 43190 43281 43373 43465 95.976000000000013 70.56 71.208000000000013 79.272000000000006 74.016000000000005 75.239999999999995 68.472000000000008 74.016000000000005 Depreciation and amortization 42825 42916 43008 43100 43190 43281 43373 43465 63.360000000000007 68.489999999999995 70.92 71.28 71.100000000000051 72.63000000000001 74.52 76.77

Monthly Household Budget

Rent Car payment Utilities Groceries Fun Gasoline 1000 300 200 150 100 50

Expenses by Type 2017 – 2018

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