CB9143 Financial Analysis for Decision Making: Burton Sensors Report

This report provides a comprehensive financial analysis of a proposed acquisition. It examines the potential acquisition of Electro Engineering Inc. by Burton Sensors Inc., utilizing various financial tools and investment appraisal techniques. The report assesses the feasibility of the acquisition by evaluating the financial strengths of Electro Engineering Inc., including profitability and solvency ratios. It also employs discounted cash flow valuation to determine the value of Electro Engineering Inc. and analyzes the potential synergistic benefits of the acquisition. Furthermore, the report considers the option of purchasing new thermo well machines, comparing the costs and benefits to arrive at a recommendation for Burton Sensors Inc. The analysis includes the application of capital budgeting techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR) to aid in the decision-making process. The report concludes with recommendations for Amy Marshall, the president of Burton Sensors Inc., based on the financial findings.

Running head: FINANCIAL ANALYSIS FOR DECISION MAKING
Financial Analysis for Decision Making
Name of the Student:
Name of the University:
Author’s Note:

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FINANCIAL ANALYSIS FOR DECISION MAKING
Executive Summary:
This report is prepared to analyze the potentials for the acquisition of the Electro Engineering
Inc. by the Burton Sensors Inc. Merger and acquisition of business is an indirect way of growing
business. There are various intension and objectives behind the merger and acquisition of a
business. Sometime, a loss making unit is acquired or a profit making unit. Therefore, before
making such an acquisition of a business, the potentials of such a merger and acquisition must be
analyzed and there must be matching potentials with the objectives of the acquiring company. In
this report the proposal for acquisition of the Electro Engineering Inc. by the Burton Sensors Inc.
has been analyzed with the help of various investment appraisal and capital budgeting technique,
to arrive at a conclusion and a recommendation about the acquisition decision.

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Table of Contents
Introduction......................................................................................................................................3
Background to the company............................................................................................................3
Background to the case....................................................................................................................3
Analysis of the option of purchasing the new Thermo well machine.............................................4
Analysis of the proposal of acquisition of the Electro Engineering Inc..........................................6
Analysis of financial strengths of the Electro Engineering Inc.......................................................8
Conclusion.......................................................................................................................................9
References and bibliography.........................................................................................................11

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Introduction
Growth in a business is must for remaining in the competition in the market and for
survival for a longer period of time. Sustainable growth is another key factor for a business to
survive profitably for a longer period of time. There are mainly two ways for such growth in the
business, one is the generic way, where a business organization expands their business through
plaguing back their earnings as capital. On the other hand, the indirect way of business growth is
to acquire and merge with an already established and existing business unit. Therefore, merger
and acquisition can be a good business strategy for growth of a business. In the following parts
of this report, the proposal for acquisition of the business of Electro Engineering Inc. by the
Burton Sensors Inc. has been analyzed and interpreted (Zur and Shapiro 2015).
Background to the company
Burton Sensors Inc. is a company specialized in manufacturing and marketing
temperature sensors. The company is based on the country Indiana, and operating their
manufacturing process there and marketing their products in the national as well as in the
international market. They have been producing and selling various customized and high end
temperature measurement sensors. They have been performing financially and operationally well
for the last few years, and they are looking forward for expansion and growth of their business in
a sustainable way.
Background to the case
With the objective of expansion of their business in the same industry, they have planned
to purchase new thermo well machines. On the other hand, they are also having an option to

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purchase the business of the Electro Engineering Inc. which is specialized in manufacturing
Fiber-optic sensors. In both the options, they need to raise additional capital either through equity
issue or through debt financing. Therefore, in such a situation the Burton Sensors Inc. must
analyze the feasibility of both the options and make the expansion decision accordingly (Zur and
Shapiro 2015).
Analysis of the option of purchasing the new Thermo well machine
Thermo well is a major part of their products and it is having some advantages in
installing the thermo well with the sensors. Till now, they have been outsourcing the production
of the thermo well and using it with their sensors. It cost a significant part of the cost of
manufacturing the sensors. Hence, if the thermo well manufacturing machine can be purchased
then the part can be manufactured in-house at a lower cost and with good quality. Hence, the
purchase of the thermo well manufacturing machine can help them to produce their product at an
optimized cost and to offer it to their customers at a lower price. Before making the decision of
purchasing the thermo well manufacturing machine, the costs associated with it and the expected
benefits arising from it must be compared and analyzed (Zur and Shapiro 2015). It can be
observed from the case study that, to meet the requirement of the company, four thermo well
manufacturing machine will be needed. It has also been estimated that four thermo well
manufacturing machine will cost $600,000 to purchase and it will have an economic life of 7
years. It has also been estimated that the wages for operators for the new thermo well machine
will be $170,000 per annum with an additional cost of $780,000 per annum for the cost of rent of
space and other materials. Also to manufacture the thermo well in-house, there will be an
additional working capital requirement of $650,000. If the requirements of the thermo well can

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be met from their in-house manufacturing then, there will be a total cost savings of an estimated
amount of $1,400,000.
With the assumption of the 3% risk free rate, 5.8% market risk premium and a risk
coefficient of the company of 0.048, the following capital appraisal and investment evaluation
techniques can be applied for evaluating the option of purchase of thermo well machines.
It can be observed from the above analysis, that the option of purchasing the thermo well
manufacturing machine is having a net present value of more than $2 million. The internal rate
of return is 34% which is much higher than the required rate of return. Hence, it can be
recommended that the company can go for purchase of new thermo well manufacturing machine
and start manufacturing the thermo well in-house.

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Analysis of the proposal of acquisition of the Electro Engineering Inc.
The Amy Marshall, the president of the Burton Sensors Inc. is also interested in
expanding their business to a new segment of fiber optic sensors. As Electro Engineering Inc. is
specialized in manufacturing fiber optic sensors, it can be a good strategy for the Amy Marshall
to acquire the business of the Electro Engineering to expand their business in the fiber optic
sensors segment. From the historical information about the financial performance and financial
position of the Electro Engineering Inc. can be assessed and the future potentials can be
estimated based on such information. In 2016 the Electro Engineering Inc. was having a net
assets of $2 million and a revenue of $4 million in the year 2016. Though there is a ready market
and demand for the products of the Electro Engineering, the operations of the company are not
that much efficient, and some strategic changes can make the operational and financial
performance of the company more efficient (Zur and Shapiro 2015). It has been estimated that
the acquisition of the Electro Engineering Inc. would have a synergic effect and as a result the
annual selling and administrative expenses could be reduced to 23.86%. If the fiber optic sensors
are sold along with the products of the Burton Sensors Inc. as a bundled product, then there
would be a significant increase in the sales of the company. Moreover, with the access to the
resources of the Burton Sensors Inc. the cost of goods sold of the company could be reduced to
49%, which is almost 2% decrease. Hence, these synergic benefits can help the company to earn
a significant amount of profit and to achieve their overall business objectives.
On the other hand, the valuation of the company’s future performance or valuation of business is
another important measure for analyzing the feasibility of acquisition of a business. Based on the
estimated cash flow for the Electro Engineering Inc. and the required rate of return, the value of
the business can be ascertained as follows.

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FINANCIAL ANALYSIS FOR DECISION MAKING
Future expected cash flows have been estimated based on the past financial performance
and financial position of the company. As there is a sustainable growth in the sales as well as
operating cash flows of the company, the same trend has been used while estimating the future
expected cash flows (Madura 2020). The valuation has been made at the beginning of 2017. For
valuation of the business of the Electro Engineering, the future expected cash flows has been
discounted by the cost of capital or the required rate of return. The terminal value of the business
at the end of 2021 has been computed using the cost of capital and the expected perpetual growth
rate of 3.5%. The value of the business has been computed as the sum of present value of
estimated cash flows and the present value of terminal cash flow. The terminal cash flow has
been computed using the perpetual growth rate of 3.5% and the cost of capital (Finkler, Smith
and Calabrese 2018).
It can be observed that the value of the business of Electro Engineering Inc. as on the
beginning of the year 2016 is $7.74 million. Hence, if the business of the Electro Engineering
Inc. can be purchased for an amount less than the value of the business, then it could help the
Burton Sensors Inc. to earn a significant amount of profit in future and to achieve their overall
business objectives (Madura 2020).

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FINANCIAL ANALYSIS FOR DECISION MAKING
Analysis of financial strengths of the Electro Engineering Inc.
From the past few years’ income statement and the balance sheet of the Electro
Engineering Inc., their financial performance, financial position and financial strength can be
assessed. Based on the information available in the income statement and balance sheet of the
Electro Engineering Inc. following ratios can be computed for understanding the profitability of
the company and the financial strength of the company (Finkler, Smith and Calabrese 2018).
Gross profit margin is the measure of profitability comparing the gross profit earned by
the company with the net sales. It can be observed that the Electro Engineering Inc. is having a
gross profit margin of 48.42% in the year 2014, it has been increased to 49.20% in the year 2015
and again it has been decreased to 48.80%. The company is having a significant gross profit
margin, which implies the company is able to produce their products at a lower costs. Net profit
margin is another measure of profitability of a company. It can be observed that, the company is
having a net profit margin of 6.42% in the year 2014 and it has been increased to 7.37% in the

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year 2016. As compared to the gross profit margin, the net profit margin of the company is
significantly low. Though there is an increasing trend in their net profit margin, a lower net profit
margin implies higher marketing and administration costs. Hence, if the company is acquired by
the Burton Sensors Inc., due to synergic effect, the marketing and administration costs could be
minimized and the profitability of the company can be maximized further (Banerjee 2015).
Financial stability and solvency is another aspect which must be considered and analyzed
before making such investment decision. For analyzing the financial stability and strength of the
company, current ration and the debt ratio can be computed. It can be observed from the above
computations that, the Electro Engineering Inc. is having a current ratio of 5.06:1 in the year
2014 and it has been further increased to 5.55:1 in the year 2016. The standard of the current
ratio is 2:1, while the Electro Engineering Inc. is having a current ratio of much higher than the
standard. Hence, the company is having a very good short term solvency. On the other hand, dent
ration is the measure of the long term solvency of a company (Banerjee 2015). It can be observed
from the above analysis that, the company is having a debt ratio of 2.48 in the year 2014, it has
been increased to 2.98 in the year 2015 and 3.43 in the year 2016. In terms of debt ratio also, the
company is having a good long term solvency and increase in the financial position of the
company. Therefore, a good gross profit margin implies better financial performance of the
Electro Engineering Inc. and a higher current ration and debt ratio implies good financial
strength of the Electro Engineering Inc. (Banerjee 2015).
Conclusion
From the above discussion and analysis, it can be concluded that, the decision of Amy
Marshall, the president of Burton Sensors Inc. about the future expansion of business into a new

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segment and new horizon of the industry is justifiable as to maintain the sustainability and
sustainable growth of their company. From the analysis in the first part of this report, the
significance and feasibility of the purchase of new thermo well manufacturing machines has
been established. Further, the acquisition of the business of the Electro Engineering Inc. is also
justifiable as the Electro Engineering Inc. is having a good financial performance and financial
stability. There is a significant growth in the financial performance and a significant
improvement in the financial position of the company. As there a significant positive synergic
effect can also be estimated, it can be recommended that, the Burton Sensors Inc. can go for
acquisition of the business of the Electro Engineering Inc.

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References and bibliography
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