Corporate Finance Case Study: Coffee Manufacturing Company Expansion

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Corporate Finance (Case Study)

Table of Contents
1. Financial Analysis...............................................................................................................................3
Cash Flow from Operational Activities...................................................................................................3
Capital Budgeting Analysis.....................................................................................................................6
2. Executive Summary.............................................................................................................................7
Definition of problem..............................................................................................................................7
Objectives................................................................................................................................................7
Methods...................................................................................................................................................7
Key Findings...........................................................................................................................................8
Conclusion...............................................................................................................................................8
Recommendations...................................................................................................................................9
3. Other Factors.....................................................................................................................................10
Other Factor which management need to consider for the project.........................................................10
Reference...................................................................................................................................................12

1. Financial Analysis
Cash Flow from Operational Activities
Particular
I
year
II
year
III
year
IV
year V year
VI
year
VII
year
VIII
Year
IX
year
X
year
Sales Unit 600 800 1,100
1,20
0 1,300
1,45
0
1,50
0
1,60
0
1,40
0
1,35
0
Selling
price
2,00
0 1,900 1,750
1,70
0 1,600
1,45
0
1,35
0
1,20
0
1,10
0
1,00
0
A. Sales
Value
1,20
0,00
0
1,520,
000
1,925
,000
2,04
0,00
0
2,080,00
0
2,10
2,50
0
2,02
5,00
0
1,92
0,00
0
1,54
0,00
0
1,35
0,00
0
Per Unit
Cost 550 520 490 450 430 410 400 390 380 380
B. Raw
material
Cost
330,
000
416,0
00
539,0
00
540,
000 559,000
594,
500
600,
000
624,
000
532,
000
513,
000
Gross profit
( A-B)
870,
000
1,104,
000
1,386
,000
1,50
0,00
0
1,521,00
0
1,50
8,00
0
1,42
5,00
0
1,29
6,00
0
1,00
8,00
0
837,
000
C.
Expenses
Research
And 20,0 20,00 20,00 20,0 20,0 20,0 20,0 20,0 20,0

development
Cost 00 0 0 00 20,000 00 00 00 00 00
Start up
cost
200,
000
200,0
00
200,0
00
200,
000 200,000
200,
000
200,
000
200,
000
200,
000
200,
000
Marketing
text Cost
50,0
00
50,00
0
50,00
0
50,0
00 50,000
50,0
00
50,0
00
50,0
00
50,0
00
50,0
00
Rental
Expenses
158,
500
158,5
00
158,5
00
158,
500 158,500
158,
500
158,
500
158,
500
158,
500
158,
500
Advertising
Cost
28,0
00
28,00
0
28,00
0
28,0
00 28,000
28,0
00
28,0
00
28,0
00
28,0
00
28,0
00
Supervision
For
production
180,
000
180,0
00
180,0
00
180,
000 180,000
180,
000
180,
000
180,
000
180,
000
180,
000
Shift
Charges
300,
000
300,0
00
300,0
00
420,
000 600,000
600,
000
600,
000
600,
000
600,
000
600,
000
Light and
Power
expenses
15,1
00
15,10
0
15,10
0
15,1
00 15,100
15,1
00
15,1
00
15,1
00
15,1
00
15,1
00
Depreciation
108,
900
108,9
00
108,9
00
108,
900 108,900
108,
900
108,
900
108,
900
108,
900
108,
900
Profit From
Operations
[(A-B)-C]
(190,
500)
43,50
0
325,5
00
319,
500 160,500
147,
500
64,5
00
(64,5
00)
(352,
500)
(523,
500)
Add -
Depreciation
108,
900
108,9
00
108,9
00
108,
900 108,900
108,
900
108,
900
108,
900
108,
900
108,
900
PBT
(81,6 152,4 434,4 428, 256, 173, 44,4 (243, (414,

00) 00 00 400 269,400 400 400 00 600) 600)
Less - Tax
@ 30% -
45,72
0
130,3
20
128,
520 80,820
76,9
20
52,0
20
13,3
20 - -
Profit
After Tax
(81,6
00)
106,6
80
304,0
80
299,
880 188,580
179,
480
121,
380
31,0
80
(243,
600)
(414,
600)
Less -
Depreciation
108,
900
108,9
00
108,9
00
108,
900 108,900
108,
900
108,
900
108,
900
108,
900
108,
900
PATBD
(190,
500)
(2,22
0)
195,1
80
190,
980 79,680
70,5
80
12,4
80
(77,8
20)
(352,
500)
(523,
500)
* PVF @
13%
0.88
496
0.783
15
0.693
05
0.61
332 0.54276
0.48
032
0.42
506
0.37
616
0.33
288
0.29
459
Net Cash
Flow
(168,
584.
88)
(1,73
8.59)
135,2
69.50
117,
131.
85
43,247.1
2
33,9
00.9
9
5,30
4.75
(29,2
72.7
7)
(117,
340.
20)
(154,
217.
87)

Capital Budgeting Analysis
Net Present Value
Particular Amount
Initial Investment 1,340,000
Less-
Salvage value 73942.09
Net Cash Inflow (136,300.11)
Net cash Flow ( Outflow ) 1,402,358
*Assumptions
 Below mentioned expenses are amortized during the life of the project in the absence
of relevant information
o Research And development Cost
o Start up cost
o Marketing text Cost
o Advertising Cost.
Working Notes
Depreciation
Particular Equipment Packing Machine
Cost of the machine 970000 370000
Less:- scrap Value -230000 -21000
Net Cost of machine 740000 349000
÷ Number of year 10 10
Depreciation 74000 34900

2. Executive Summary
Definition of the problem
Tom Smith the chief executive officer of Coffee Manufacturing company in which company
wants to expand their business activities by the purchase of two new types of machinery for their
production activities which can perform a key role in the future growth of the company. In this
assignment major issue is the financial feasibility of the project which is a company need to
adopt (Rossi, M. 2015). Further management wants to know about the profitability and future
returns from the project which helps in taking a major decision for investment in the project.
Tom Smith need to recognize the revenue which they can achieve after the installation of new
machinery and equipment in the business process.
Objectives
This study is conducted to evaluate the financial performance of the project in which the
company wants to invest its fund for the future growth of the company. The prime objective of
the study is to evaluate the financial performance of the project. To support prime objective
company need to achieve the achieved the probable return from the project which is the
secondary objective for management towards the project in which company wants to invest their
fund for achieved healthy growth in the market.
 To ascertain the profitability of the project in a new future for the company.
 To evaluation of the financial performance of the company through an expansion
project.
 Ascertain net Revenue Generation from an expansion strategy for the company.
Methods
Tom Smith wants to recognize the revenue which they can generate through eh expansion
strategy from their operational activities of the business entity. To identify the revenue
Generation Company used Investment appraisal technique so that they can understand the
financial performance of the company in the market.
 Net Present Value – net present value is the method of investment appraisal technique which
identified net revenue generation from the business activities in the near future from their
business activities (Leyman, & Vanhoucke, 2016). NPV Subtract net cash outflow from a net
cash inflow to identified net earnings and revenue from operation with the concern of time

value of money. This method is the most suitable method to evaluate the financial feasibility
of the project.
Key Findings
CMC Company wants to expand their business for which they used the investment appraisal
technique to evaluate the financial performance of the project in the near future. Net present
value method is used to analyze the financial information of the project which is provided in the
given case study. Financial analysis is conducted on which some of the findings are identified
which are listed below –
 From the study and use of net present value, it is identified that company had faced the
financial losses in starting the year in which they have to bear some of the additional cost as
the company is new in the market company had a net financial loss of 147,000 in starting two
years.
 The company generated net cash flow from the business activities is (-136,300) which means
the company faced the financial loss from their business activities during the life of the
project which is ten years for the company.
 Further, the company had the scrap value for the machinery which they want to purchase.
Both the machinery had the present value worth of $ 73942.09 which can be realized at the
end of the project life cycle to the company. Scrap value defines as the price which is
realized at the end of the life of the assets in the market.
 Company has to invest the fund of $1,340,000 in the initial stage of the project which they
assumed to be achieved during the life of the project. As a company invests a high amount in
the project so the expected return is also high for the management of the company.
 The company suffers the financial loss of $1,402,358 from their business activities which can
majorly impact on the financial performance of the company. This project is not profitable
for the company as they suffer heavy loss at the end of the project and also the time duration
which project need is high so that company needs to properly evaluate the project on various
factor exist in the market so that they are able to take an adequate decision for the welfare of
company.
Conclusion
This study conducted to analyze the financial performance of the project and also analyze the
financial Information which guides company or management to recognized net earnings from the
investment in the project. From the whole analysis, it is concluded that if the company invested

their fund in the project of the company then they have to suffer high financial loss from the
project. This project consists of heavy initial cost and also project is not able to generate the
revenue from the sales of the goods from the machinery which indirectly impact on the financial
performance of the company in the market.
Recommendations
The whole analysis portrait some of the images toward the profitably or performance evaluation
of the project for the company which mainly indicates the failure of the project as it consists of
heavy financial loss in the near future. Here some of the recommendations are provided for the
management in the context of financial analysis of the project.
 Company or management need to avoid the project as this project provide the financial loss
of $1,402,358 to the company from their business activities which mean the company has
to drop the investment option in this project and it is recommended that company need to
find the new option for their investment as compare to purchase of this machinery.
 Management needs to recognize other factors which indirectly increased the cost of the
project like research and development cost which is not directly related to the project but
highly impactful on the profitability of the project.
 There are many of the factors are exist in the market which can influence the financial
performance of the business activities. So the company needs to consider that factor also and
the financial tool which is used by the company had certain limitation so it is recommended
that company can compare project on other aspects so that they are able to take the right
decision for the company.

3. Other Factors
Other Factor which management need to consider for the project
There are many of the factors are exist in the market which the company needs to consider while
evaluation of the project. CMS Company wants to invest their fund in purchase of the machinery
or equipment for their business activities (Kerzner, 2018). Majorly company needs to recognize
about the non-monetary and other factors which are existing in the market and also influence on
the financial performance of the company. So that management needs to recognize those factor.
Here some the factors are listed which need to be recognized before the decision making in the
context of the purchase of machinery by CMC Company.
 Market trends – Market trend is highly impacting on the financial performance and revenue
generation of the company so that the company needs to understand and analyze the factor
which can be impacted by market trend. For CMC sales are the more dynamic factor which
can be impact by the market trend and this can indirectly impact on revenue generation of the
company in the market.
 Production Capacity - CMC Company runs its operational activities on the capacity of 50%
which is half of their full capacity. This can be a major factor of financial loss from the
project as if the company run their business on 75% of the capacity then the scenario is
different from the current situation (Leanmanufacture, 2019). If the company runs its
business on the capacity of 75% instead of 50 % then there are the chances of high revenue
generation form the business activities of the company.
 Non-Financial Factor – There are many of the factors are exist in the market which can be
the impact on the financial performance of the business activities of the company but
management are not able to measure those factor in monetary term (Ijaz and Khan, (2013).
As customer and employee satisfaction are the vital factor which can impact on the financial
performance of business entity but can't be measurable in monetary value for the company.
There are many of the factors like customer and employee satisfaction are exist in the market
which appraises impact on the financial performance of the company.

 Prior operation activities – Financial loss of the project is highly dependent on the initial cost
of market research and other research and development cost which is bearded by CMC
Company and also this cost impact on the financial performance of business activities.
Management of the company needs to assess the effectiveness of this cost and also their
impact on their financial performance so those companies are able to identify the actual profit
from the operational activities of the business. As this cost considers the high part of the
expenses for the company so that management can analysis their impact and exclude
unnecessary cost from the operational activities of the business.

Reference
 Ijaz, M. and Khan A., (2013). The impact of Non-Financial Incentives on employees’
motivation. IOSR Journal of Business and Management. Volume 15. Issue 4. PP 37-46
 Kerzner, H. (2018). Project management best practices: Achieving global excellence. John
Wiley & Sons.
 Leanmanufacture, (2019). Production and process capacity. [Online]. Leanmanufacture.
Available at:- http://www.leanmanufacture.net/operations/capacity.aspx [Accessed on
25.05.2019]
 Leyman, P., & Vanhoucke, M. (2016). Capital constraints and net present value optimization
in project scheduling. In 15th International Conference on Project Management and
Scheduling (pp. 98-101).
 Rossi, M. (2015). The use of capital budgeting techniques: an outlook from
Italy. International Journal of Management Practice, 8(1), 43-56.
 Sari, I. U., & Kahraman, C. (2015). Interval type-2 fuzzy capital budgeting. International
Journal of Fuzzy Systems, 17(4), 635-646.