ACC00716 Finance, Southern Cross University, Australia
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Question: Prepare a spreadsheet financial analysis of the proposed options and a memo to DuoLever's CEO that briefly explains and justifies your chosen methods, inputs and any assumptions made, summarises your findings, and presents your recommendations on the proposed options.
Answer: MEMO
TO: The Chief Executive Office
FROM: The Financial Assistant
Date: XX/XX/2019
SUBJECT: Analysis and making genuine choice amongst the available all the alternatives present before us
I am writing this letter to inform you that our business undertaking wishes to undertake either of the two alternatives available before us. We understand the growing need to abide by corporate regulations combined with environmental concerns and the necessary legislative actions. These potential proposals are aimed to make our conscious efforts visible for environmental protection and sustainable environment. In this Era of rapid industrialisation, the need for corporate sustainability is gaining immense popularity and momentum. The company hence has decided to adopt recycling methods of its plastic packaging material to ensure that it meets the ground for a better external environment. The two options that have come to our notice are as follows:
1. Duo lever can either license to use of patents to another organisation (clean energy ltd.)or;
2. The company can also choose to add recycled plastic sachets to its business portfolios and sell it along with its product.
In this phase of continuous development and the hunger to grow, Business organisations have been making continuous conscious efforts for the betterment of our external environment including the major stakeholders. Hence they become accountable for the activities they perform which directly affect the investors, both potential and existing ones.Abiding by sustainability laws can make an organisation gain public confidence and their continuity of operations through integrity of our business operations. Our organisation now seeks to work on the twofold principle of growth and sustainability. Taking this into account, we have conducted a research analysis for the same. This has revealed results showing how our business operations tend to affect the environment adversely.
It puts forward our Questionable activities to words the environment. Approximately 8 million metric tonnes have been revealed to be dumped into our external community (i.e., the land, air and water). These activities are prone to giving birth to several incurable diseases which may prove fatal for our existence and for our future generations. Moreover, this dump is expected to increase by hundred percent till financial year 2025. We have spent over $50 million in undertaking such research and development programme. This cost is termed as sunk cost as it is irrelevant to the business organisation and taking further decisions and has already occurred in the past. They place no impact on our ability to choose any of the above situations. (Covey, 2010)
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The first proposal of licensing of patents to be used by an organisation has been accepted by one of our potential partners, Clean World Ltd. This business partner has been showing us trust and continuous interest in our organisation. The deal is to provide us the recycle version exclusively and slowly. They shall continue for the coming five years. The projects aim to generate an increased sales revenue by 2% than the usual forecasted sales had the proposal not been taken. They would produce recycled version of a virgin plastics through our methods and processes. This output shall be sold to us exclusively by the business partner. Speaking of the costs, it shall remain the same as before. Apart from this, supplier shall charge us a margin of 10% and additional expenses amounting to $1 million shall be incurred owing to administrative costs and general expenses. Apart from these quantitative factors, there would be no non-cash charges like depreciation expenses in the absence of any initial outlay to be made by us. This proposal shall allow us to save on energy costs. This alternative seems to generate a net present value of $578177877. We have reached this value after discounting the cash flows at the rate of 8% per annum and deducting corporate taxes of 25% per annum. Analysing the situation on an individual basis, it would be feasible to accept the proposal as it seemed to yield us with a positive value. Reference for this proposal has been shown in appendix 1. (Surendranath Rakesh Jory, 2017)
The other proposal would initiate us in using the plastic packets sold to our customers by undertaking better and effective recycling procedures. Sales revenue shall increase as the same rate as stated above in proposal one. We would be required to make a huge capital expenditure of $20 million for purchasing the assets for the same. There shall be depreciated on a fixed instalment basis at the flat rate of 20%. They shall have no salvage value after five years. We would be required to raise a loan of the same amount to meet the needs of buying the machine. Interest for the same would charge us 7% per annum during the life of the deal. We expect that our revenues would increase so high that these charges shall easily be absorbed. Not only surely benefit from the increase in sales on one hand, variable costs are too likely to decrease by 15% to adoption of this proposal. Supplier's margin would eliminate completely. However, we shall also witness a rise in payment to Clean WorldLimited. All the above mentioned costs are relevant enough to be included for assessing the Net present value our company seeks to derive from the proposal. If proposal one is not undertaken, clean energy Ltd shall provide us with some sort of benefit again. A proper plastic waste system shall be installed for collection of waste from the plastic packaging sold. Additional administrative and general expenses shall increase by $2 million every year till the end of the project. Recycling products shall provide us with non-quantitative factors as well. It shall augment our reputation in the industry by making as exploit further opportunities to grow. Corporate sustainability is the reason behind our move. This alternative shall provide us with a positive net present value of $ 572392657. Again if this proposal needs to be judged on an individual basis, it can be selected as it results positively. Appendix 2 can be referred for this purpose.
Upon comparison of the above alternatives, it can be clearly said that alternative 1 shall be fruitful for our company for the next five years down the line. This would help us collect many roses through the road full of thorns as we aim to promote corporate and environmental sustainability. We believe that it is our duty to be accountable to our external environment as well as several other stakeholders. Apart from the benefits, recycling methods can sometimes degrade the quality of the packaging plastic. Thus, it may initially enhance our reputation but with degradation in the quality we may witness decrease in our clients with the passage of time.
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Our team wish to undertake and exploit those potential opportunities that fulfil our requirement all of economic growth as well as being responsible to words the external community. We feel that it is your duty to take conscious approach towards the environment concentrating on several parameters of corporate social responsibility. With the deep hunger in several organisations to outperform and reach new heights, abiding by social responsibility becomes mandatory.
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