Financial Management
Essay by Lorrena Guzman • March 26, 2017 • Case Study • 943 Words (4 Pages) • 930 Views
Point of View:
The case study will use the point of view of a financial management consultant. A consultant is someone who has expertise in a specific area and offers unbiased opinion and advice for a fee. Through independent and objective advisory services, consultants can recommend solutions that will improve the client’s use of its resources and help it achieve the objectives of the organization.
Alternative Courses of Action:
- Ball - As Is, Equipment – Expand, Accessories – No Expansion
The Expand alternative will be implemented because it has a higher net present value than the Price Increase alternative. Currently, Pinnacle can only produce 40,000 sets a year. However, annual demand is running at about 65,000 sets and management feels that it will continue to increase. Expansion of the equipment division will enable Pinnacle to keep up with the high demand for their clubs. Expansion of the accessories division would not be feasible due to the expansion of the equipment division. Both are major projects and top management believes that if more than one major project is implemented, none will be done right. Lastly, the As Is option will be implemented for the golf balls division.
Equipment - Expand
Cash outflows | 11,600 |
PV of Incremental After-Tax Cash Inflows (14% discount rate) | |
t+1 | 2,719 |
t+2 | 2,616 |
t+3 | 2,835 |
t+4 | 2,487 |
t+5 | 2,181 |
t+6 | 4,100 |
Total | 16,938 |
Net Present Value | 5,338 |
Ball – As Is
t+1 | t+2 | t+3 | t+4 | t+5 | t+6 | |
Sales ($000s) | 40,000 | 40,000 | 40,000 | 40,000 | 40,000 | 40,000 |
Cost of Goods Sold | 24,000 | 24,000 | 24,000 | 24,000 | 24,000 | 24,000 |
Gross Profit | 16,000 | 16,000 | 16,000 | 16,000 | 16,000 | 16,000 |
Marketing | 1,600 | 1,600 | 1,600 | 1,600 | 1,600 | 1,600 |
Administrative | 3,800 | 3,800 | 3,800 | 3,800 | 3,800 | 3,800 |
Miscellaneous | 4,000 | 4,000 | 4,000 | 4,000 | 4,000 | 4,000 |
Total | 9,400 | 9,400 | 9,400 | 9,400 | 9,400 | 9,400 |
Net Income Before Tax | 6,600 | 6,600 | 6,600 | 6,600 | 6,600 | 6,600 |
40% Tax | 2,640 | 2,640 | 2,640 | 2,640 | 2,640 | 2,640 |
After-Tax Cash Inflows | 3,960 | 3,960 | 3,960 | 3,960 | 3,960 | 3,960 |
PV of After-Tax Cash Inflows (11% discount rate) | ||||||
t+1 | 3,568 | |||||
t+2 | 3,214 | |||||
t+3 | 2,896 | |||||
t+4 | 2,609 | |||||
t+5 | 2,350 | |||||
t+6 | 2,117 | |||||
Total | 16,754 |
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