Report on Strategic Financial Decisions

Summary
Write a 2500-word report based on a financial scenario, given the context and financial information provided. Analyse two options proposed by the case study management team to maximise their company’s value. Conduct the necessary financial analysis using the information provided and the appropriate techniques, tools and frameworks. Make decisions and recommendations based on the analysis, considering all relevant implications, challenges and limitations.

Learning outcomes
Demonstrate understanding of core contemporary financial management theory, techniques and practice.
Critically evaluate and effectively communicate recommendations to address financial management issues.
Apply financial management theory and techniques to professional practice in an ethical manner.
Task
Context
The Capstone Assessment follows on from the financial review of Aftab Pty Ltd undertaken in the First Assessment.

Aftab Pty Ltd understands that, these days, taking your business online is not a choice but a necessity. Aftab Pty Ltd’s management team have brainstormed two options with the objective of maximising Aftab’s value. It is expected that with the online presence, demand for their products would increase. As part of the management team and a financial analyst, you have been asked to investigate the viability of the different options. The two options A and B are outlined below.

Option A: Build an online presence

Aftab Pty Ltd’s management is evaluating a proposal to invest in a modern network system to build up their online presence. The associated infrastructure of the new network would cost $500,000 (including installation costs) and has a useful life of 5 years. The infrastructure will be depreciated during these years as per the straight-line method and has no scrap value at the end of its life. The enhanced online presence due to the new network system would generate $56,000 per year in net profit over the next five years.

To evaluate the above project, utilise the capital budgeting techniques that you have studied in this subject. For this purpose, you are recommended to use a required rate of return of 10%. Please note that no additional working capital is required for this project.

Option B: Outsource the online presence project overseas

Aftab Pty Ltd is investigating an opportunity to outsource the online presence project to a developing country. Through the outsourcing program, it is expected that the total cash fixed cost will drop by $200,000. The cost reduction will be achieved through access to cheap call centre facilities. Aftab’s current cost structure per annum (pre-outsourcing) is given in the table below:

Number of units produced per annum
15,000
Sales price per unit
$80
Variable cost per unit
$38
Total cash fixed cost per annum
$450,000
Total depreciation per annum
$100,000
You have been asked to assess the above plans and present your recommendations.

Print version: financial information for Option A & Option B

Written report
Write a report for the management team that addresses points 1 to 4 below:

Complete a financial evaluation of Option A using both NPV and simple Payback Period (not the discounted payback) capital budgeting techniques. Discuss which one is better and why. Use the payback cut-off period of 2 years for the evaluation, and use 12% as the discount rate to calculate the NPV. In assessing Option A, your report should also consider a sensitivity analysis on the NPV for the discount rate changing from 12% to 17%. Investing in a foreign country can be classed as a ‘risky investment’. How can the risk-return principle be applied here and, from a financial modelling point of view, how can the risks of the project be analysed?
Complete a critical assessment of Option B using break-even analysis. Calculate and evaluate the current accounting and cash break-even points of the business. Your analysis of Option B should then include the revised break-even points (both cash and accounting break-even points) considering the outsourcing option. Based on market research, you anticipate sales with the new outsourcing option to remain the same at 15,000 units. Comment on the financial and non-financial implications of Option B.
A further idea briefly discussed by Aftab’s executive team (but not as an option) was to extend the payment terms for customers from 20 days to 30 days. What are the implications of increasing the payment terms of customers to the cash cycle? Discuss possible scenarios where providing an extended payment term could benefit Aftab Pty Ltd.
Based on your analysis in points 1 and 2, recommend either Option A or Option B, or both, to the Aftab management team. Your recommendation should also include a detailed limitations section covering the challenges of using NPV, Payback Period and break-even points in the decision making.
Procedures
Your report should be presented in a report format following the AIB Style Guide. Please use the AIB Report Template document to format your report.
Use the AIB-preferred Microsoft Word settings as per the AIB Style Guide.
Please refer to the 8006FMGT Assessment Exemplar for how to structure your presentation and arguments in this assessment. In each section of your report, please define the financial concepts and/or critical theories before calculations/analyses.
The required word length for this report is 2,500 words (plus 10% tolerance, excluding tables and reference list). Please focus on analysis and interpretation of the data, addressing implications, and providing suggestions/recommendations where possible linked to your analysis and supported by relevant financial principles, concepts and/or theoretical frameworks.
We have provided a PDF Formula Sheet of all relevant formulas from the textbook.
To support your arguments, you are required to use at least six (6) relevant and credible references for this report.
As per the AIB Style Guide, your references must be from credible sources such as academic journal articles, academic texts, professional/industry-related journals, government reports and formal company documents. Ideally, relevant academic journal articles should be used for academic discussion.
For the guidelines on the Harvard Referencing Style used at AIB for in-text citations and the reference list, check the AIB Style Guide.
Grading criteria and feedback
Your assessment will be marked according to the following grading criteria:

Understanding of principles, concepts, and theoretical frameworks in cost, working capital management, and capital budgeting techniques – 20%
Use of required capital budgeting techniques (i.e. NPV, Payback Period) and application of sensitivity analysis to critically evaluate Option A – 25%
Use of break-even analysis technique to critically evaluate outsourcing Option B – 15%
Use of relevant concepts to discuss working capital and cash conversion cycle and the implications – 10%
Conclusion, limitations and recommendations on capital budgeting and break-even analysis – 20%
In-text citations and referencing – 5%
Communication, presentation, structure and language – 5%