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Financial Analysis - Memorandum Assignment
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. Ensure you not only address base case cash flows but also analyse potential uncertainty.
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Solution:
To: the chief executive officer
From: Financial officer
Subject: Critical analysis of alternatives available before us for environmental protection purposes
This letter has been written to draw your attention towards the various options available before us in a conscious effort aimed at environmental sustainability and protection. We understand the growing need to abide by corporate regulations combined with environmental concerns and the necessary legislative actions. Hence, two alternative stand before us that could increase the goodwill in the market through either of their adoption.With the increase in the intensity and magnitude of rivalry between pure competitors, it becomes all the more essential to stick to basics and mandatory guidelines issued by the government for the protection of the community we operate in. Hence our research team has conducted an analysis that has revealed major as well as drastic results. It states that we have done almost 8,000,000 metric ton of waste into the environment through land water and air. Further, it also reveals that the waste shall increased by hundred percent in the next 15 years, that is till 2015. Such amount of waste seems to take a toll on the environment as well our longevity in the industry. Thus two viable options calculated are as follows:
• Option one is to add production of reused plastic packets in our portfolio, or
• Option two involves providing license to use of patented methods to another interested organisation.
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 on one hand while eliminating chances of being attracted to legal penalties. Hence it becomes necessary for our organisation as well to undertake such safeguard measures that should insure a better future for the economy and the environment. The research conducted has cost us $50 million. Since this cost was incurred prior to take undertaking any of the above alternators, it shall be treated as sunk cost and therefore will have no relevance in the decision making process. (Olivola, 2018)
The first option would enable us to produce recycled version of our waste plastic packet that we used to sell to our customers buying our products. This would augment our sales revenue to 102% per annum. Speaking about the cost, we shall have to incur a fixed capital expenditure of $20 million in the initial year for the purchase of required planted machinery. Since the value of machine after the end of five years of the project will not generate any salvage value, depreciation shall be charged under the straight line method at a flat rate of 20% per annum. The funds used in buying the machine shall be raised through a loan bearing interest rate of 7% per annum. These interest charges seem to have minor affect on the cash flows generated throughout the life of the project. The variable cost on the other hand shall too provide us with a further benefit through the decline of 15% annually. Other than this, there shall be increase in administrative and general costs amounting to $2 million every year. Supplier's margin shall be eliminated accompanied with the rise in payment to clean world ltd. Using a discount rate of 8%, this project seems to generate a net present value of $ 572392657. (Gallo, 2014)
The second option involves our organisation to provide license to clean world limited to use our patented procedures for recycling the waste plastic.This business partner have 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 revenue shall be the same as the one stated in the above option. The variable cost shall remain the same had we had not taken any of the above options of recycling methods. 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. Tax rate shall be levied of 25% per annum. They shall seem to generate the net present value of $ 578177877.
Comparing the above facts of the two alternatives provided, it can be financially feasible for us to select alternator that shall generate a higher Net present value. Hence, it shall be suggested that we continue with the proposition for better future and financial reasons. Recycling plastics can save the environment from tremendous damage but it may also attach us with several uncertainties as well. The quality of the packaging material may deteriorate making our product less attractive visibly. This may tend to initially attract new customers but gradually it is building room for a lower consumer base.
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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