Financial Management Report: Hillside Industries Expansion Analysis

This report provides a comprehensive financial analysis for Hillside Industries, focusing on capital budgeting techniques to evaluate an expansion project. It examines working capital requirements, calculating the cash conversion cycle and its impact on liquidity. The report also conducts a break-even analysis, comparing accounting and cash break-even points to determine the minimum production levels needed for profitability under existing and proposed scenarios. Furthermore, the report calculates the Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period to assess the project's financial viability, concluding that the investment is profitable. The report also explores different sources of funding, recommending debt financing due to its tax benefits and lower risk profile compared to equity. Finally, the report recommends endorsing the expansion plan to the Board of Directors, supported by the positive financial metrics and strategic advantages identified.

Running head: FINANCIAL MANAGEMENT 1
FINANCIAL MANAGEMENT

Running head: FINANCIAL MANAGEMENT
Executive summary
Financial management is a wider term and the capital budgeting is an important process
and it is helpful in deciding the worth of the investments for which the funds are used. In this
current report a detailed understanding has been carried out for Board of Directors to understand
the net present value, payback period and the internal rate of return and their benefits. Further, an
understanding between the cash and the accounting break-even is bifurcated with tables and it is
clearly evident the project is acceptable with debt component being used as the source of finance.

Running head: FINANCIAL MANAGEMENT
Table of Contents
Introduction.................................................................................................................................................4
Question 1: Working capital requirements..................................................................................................4
Question 2: Breakeven Point.......................................................................................................................6
Question 3: Net present value......................................................................................................................8
Question 4: Sources of funds.......................................................................................................................9
Question 5: Recommendation’s endorsement............................................................................................10
References.................................................................................................................................................11

Running head: FINANCIAL MANAGEMENT
Introduction
Capital budgeting technique is the technique which is used by the company to analyze
the worth of the funds invested for the projects. The term capital budgeting is one of the crucial
terms of the finance subject and is widely used by the company. It also depicts the quantitative
view of each proposal in which the company has invested so that the management can take a
rational decision. In this report a detailed analysis is undertaken with respect of the treatment of
the working capital, net present value, cash conversion cycle and which source is useful for
expansion (Benamraoui, Jory, Boojihawon & Madichie, 2017).
Question 1: Working capital requirements
The working capital management is the strategy designed by companies to make sure
that the operations of the companies are running efficiently. The working capital is analyzed on
the basis of current assets and current liabilities and its impact on the financial statements. In this
section, Hillside Industries have implemented the working capital procedure to gather an
understanding of its implications over the increase in the payment and receivable period (.
(Source: Wang, 2019).

Running head: FINANCIAL MANAGEMENT
The working capital forms the corner stone of any business and the concept of the
working capital ensures the liquidity position of Hillside Industries. It assists in keeping the
enough cash so that the operational costs are also settled. The proper allocation of the resources
can be judged only on the basis of the working capital. The method of the working capital is also
useful in determining the profitability and the financial health of the company. The assessment of
the cash flows and outflows is also easily found out with the help of the working capital
(Sivaranjani & Kishori, 2016).
Cash conversion cycle is the operating cycle that describes in how much time the
company is able to convert the inventories into cash and collect the cash from receivables and
pay back to the creditors. The cash conversion cycle in case of present scenario is 18 days
whereas if the days of the collection and the average payment period have been increased from
155 to 30 days than in that case, the cash conversion cycle will increase to 33 days. Further, it
also implies that the cash which was used to be converted in 18 days, the same is going to be
converted in 33 days now. This will surely have a huge impact on the liquidity position of the
company. The realization of the inventory is within 15 days only and the payment is made to the
suppliers in 12 days. If there is an increase in the receivables the overall cash cycle is going to
suffer of Hillside Industries (Wang, 2019).
Calculation of cash conversion cycle Number of days Number of days
Original Revised
Days inventory outstanding (DIO) 15 15
Days receivables outstanding (DRO) 15 30
Days payable outstanding (DPO) 12 12
Cash conversion cycle 18 33

Running head: FINANCIAL MANAGEMENT
Question 2: Breakeven Point
The breakeven point is the point at which the total revenue and the total costs are
equivalent to each other. It is the key financial analysis tool used by the business owners to
analyze how many minimum units are required to be produced. In this section for the case of
Hillside Industries, the break-even point has been calculated in two different scenarios such as
cash breakeven and accounting breakeven point.
Under the ABP method in the existing scenario the contribution per unit comes at $70
per units and the fixed costs involves the cost of the depreciation on the automated technology of
$54000. Under this scenario, the break point is 771 units. The same can be analyzed with the
help of the table below (Kampf, Majerčák & Švagr, 2016).
Existing method
Accounting break-even point Amount Amount
Sales (units) 15000
Price 100 $ 1,500,000.00
Cost (units ) 900
Less: Cost of raw materials 30 $ 27,000.00
Contribution per unit 70 $ 1,050,000.00
Contribution margin 70%
Less: Depreciation $ 54,000.00
Total net profit $ 996,000.00
Calculation of Break-even point
Fixed costs $ 54,000.00
Contribution per unit 7000%
Break-even point 771.43
On the other hand, the break-even point in case of cash break even method is 0. Since
depreciation is a non-cash expense and there is not additional fixed costs pertaining to the current

Running head: FINANCIAL MANAGEMENT
year, the cash breakeven is 0. It also implies that since there is no fixed cost the company has no
minimum unit’s criteria to fulfill.
Under the proposed scenario there is slight change in the accounting breakeven point and
the cash breakeven point as under the accounting break-even point, the total fixed costs are
$94000 and this implies that both the depreciation and the additional cash expenses for
aggressive campaign is also included in order to have a clear picture of the overall costs. The
contribution per unit being same and also there was an increase in the units sold from 15000 to
20000 whereas the cost of the raw materials are measured at 60 units per day. Hence, the
breakeven point reaches to 1342.86 units, which Hillside is majorly due to increase in the fixed
costs. It also implies that the advertise campaign is costly and hence, the units have been
increased from 1341 units and company must be aware that fixed costs must not be increased to
an extreme level (Kim, et al, 2017).
Forecasted method
Accounting break-even point Amount Amount
Sales (units) 20000
Price 100 $ 2,000,000.00
Cost (units ) 900
Less: Cost of raw materials 30 $ 27,000.00
Contribution per unit 70 $ 1,400,000.00
Less: fixed costs $ 40,000.00
Less: Depreciation $ 54,000.00
Total net profit $ 1,360,000.00
Break-even point
Fixed costs $ 94,000.00
Contribution per unit 70.00
Break-even point 1,342.86

Running head: FINANCIAL MANAGEMENT
The cash breakeven point in case of the proposed situation is 571.43 units as only cash
expenses that have been incurred for ruling the campaign will only be included as depreciation is
non-cash expense. Therefore, from the other overall analysis it can be stated that, the marketing
departmental proposal is feasible in terms of cash break even as only 571 units are required to be
produced rather than 771 units in case of existing method (Wisnubroto & Suyanto, 2019).
Question 3: Net present value
The net present value is one of the core terms of the techniques of the capital budgeting.
In this section the net present value for the investment made by Hillside Industries, wanting to
expand the business has been analyzed in detail. The NPV is the difference between the present
inflows and the outflows; it is the medium through which the feasibility of the project is analyzed
in detail. The net present value for the proposal of Hillside Industries is $91681. This indicates at
present the value of the automated technology is $91681 and if the company invests in the
project, the future feasibility and growth will increase accordingly. The positive NPV indicates
that the investment will be profitable (Willigers, Jones & Bratvold, 2017).
There are several benefits for choosing the net present value as one of the techniques as it has
several benefits. The net present value method readily accepts the cash flow pattern and in fact
considers all of the cash flows. Another benefit of NPV is it considers the approach of time value
of money and treats the present value worthy enough than future value.
Apart from NPV there are other techniques as well which are also calculated to get more
understanding while choosing the investment proposal. These techniques are internal rate of
return and payback period (Andreasen, Schindler & Valenzuela, 2019).

Running head: FINANCIAL MANAGEMENT
The internal rate of return also known as IRR is the rate at which the NPV is equivalent
to zero whereas the payback period is a method that helps in defining the time period in which
the initial costs incurred for any proposal will be recovered. This method also helps in the
evaluation of the proposals in the quick manner. These two techniques are also beneficial as the
early payback enhances the overall liquidity position and it’s simpler to calculate and understand.
IRR is not dependent on the hurdle rate and timing of all cash flows is taken into consideration.
For better understanding, the calculations have been done and it has been realized that payback
period is 3.69 years and the internal rate of return in 16% which is higher than the cost of capital.
Hence, overall examination indicates the proposal is feasible and profitable as well (Frank &
Shen, 2016).
Question 4: Sources of funds
Generally the sources are funds are of different types such as debt and equity. The debt
being the fixed payment option and equity being the risk bearers the company must invest
according to their capacity and funds. On the basis of the cost of the equity and the cost of the
debt, the company must use the cost of equity as the choice for the expansion plan as the cost of
equity is already high at 11% with beta value of 2 whereas the debt cost is 6.48% (Roy, Rudra &
Prasad, 2017). Using debt helps in lowering down the risk as the debt is prone to the deductions
due to the tax factor associated. The tax savings help in reduction of the overall cost of capital.
Equity financing tends to be risky and this defines that debt shall be the right choice on account
of Hillside. Using debt also helps to retain the profits in the business itself as only the amount of
interest is paid out of profits. It also helps in maximizing the financial leverage by keeping the
extra profits for the equity investors. Hence, from the overall in-depth analysis it can be assured

Running head: FINANCIAL MANAGEMENT
that for Hillside Industries, cost of debt is the useful component (Osma, Gomez-Conde & de las
Heras, 2018).
Question 5: Recommendation’s endorsement
From the overall analysis it is conclusive that the recommended plan shall be endorsed to
the Board of the directors. The reason behind such endorsement is that the entire analysis is in
favor of the selection of the proposal. Also the concept of the breakeven point has been divided
into four sections and the ultimate result states that the minimum units that are required are less
in case of the cash accounting breakeven point as it ignored the inclusion of depreciation. Due to
the positive net present value, higher internal rate of return and the payback period is less than
the term of the investment proposal; the company will have the higher growth and opportunities
in future. In the later half, the debt has been chosen as the method for expansion of the project
only because it is subjected to tax deductions as discussed above which will be helpful in
retaining the overall gain of the business. Since the boards of the directors were bewildered this
analysis will defiantly help them out. Henceforth, Hillside industries must accept the proposal
and shall invest the funds for greater returns in the business.

Running head: FINANCIAL MANAGEMENT
References
Andreasen, E., Schindler, M., & Valenzuela, P. (2019). Capital controls and the cost of
debt. IMF Economic Review, 67(2), 288-314.
Benamraoui, A., Jory, S. R., Boojihawon, D. R., & Madichie, N. O. (2017). Net Present Value
Analysis and the Wealth Creation Process: A Case Illustration. The Accounting
Educators' Journal, 26.
Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of
Financial Economics, 119(2), 300-315.
Kampf, R., Majerčák, P., & Švagr, P. (2016). Application of break-even point analysis. NAŠE
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Kim, S., Jang, H., Gao, R., Kim, C., Chung, Y., & Bang, S. (2017). Break-Even Point Analysis
of Sodium-Cooled Fast Reactor Capital Investment Cost Comparing the Direct Disposal
Option and Pyro-Sodium-Cooled Fast Reactor Nuclear Fuel Cycle Option in
Korea. Sustainability, 9(9), 1518.
Osma, B. G., Gomez-Conde, J., & de las Heras, E. (2018). Debt pressure and interactive use of
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Roy, D., Rudra, D., & Prasad, P. (2017). Capital Structure and Capital Budgeting: An Empirical
and Analytical Study of the Relationship. Research Bulletin, 42(4), 50-60.
Singh, H. P., Kumar, S., & Colombage, S. (2017). Working capital management and firm
profitability: a meta-analysis. Qualitative Research in Financial Markets.

Running head: FINANCIAL MANAGEMENT
Sivaranjani, R., & Kishori, B. (2016). A Comparative Analysis of Working Capital Management
Among Top 5 NSE Listed Indian Steel Companies. International Journal for Innovative
Research in Science & Technology, 821-828.
Wang, B. (2019). The cash conversion cycle spread. Journal of Financial Economics, 133(2),
472-497.
Willigers, B. J., Jones, B., & Bratvold, R. B. (2017). The net-present-value paradox: Criticized
by many, applied by all. SPE Economics & Management, 9(04), 90-102.
Wisnubroto, P., & Suyanto, M. (2019). ANALISIS CAPITAL BUDGETING SEBAGAI
METODE MENILAI KELAYAKAN INVESTASI PERUSAHAAN. CIEHIS
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