BIA is a medium-sized firm that operates in Australia. The company has grown rapidly over the past couple of years. Its growth slowed down recently, so the firm is planning a rebranding project to sustain its expansion. As the finance manager, you will have to evaluate the financial viability of the rebranding project and provide relevant suggestions where possible.

Various departments of the firm have done intensive research and suggest launching a 10-year rebranding project. This project will involve a fixed cash cost of $3,200,000 per year for rent, insurance, marketing and other purposes. Under the same project, the payment period to wholesale customers will be relieved from 10 to 30 days, together with other rebranding strategies, leading to an increase in annual sales estimated as follows (three possible scenarios):

• Pessimistic: 60,000 units per year
• Neutral: 75,000 units per year
• Optimistic: 90,000 units per year

While BIA is selling its product at an average price of $100/unit, the average variable cost is $45/unit (including material, utility bill and labour cost for production). The company is liable to pay its supplier in 30 days on average. Manufacturing and selling the product take a total of 20 days on average. To accommodate the expected increase in sales due to the project, BIA would need to buy a new automated production line costing $3,800,000 today, with a lifetime of 10 years (assume straight-line depreciation and 'zero' salvage value).

As per the above estimates (e.g., sales increase, relevant revenue and costs) and assume they remain the same every year, your finance analyst estimated that this project generate a fixed amount of annual cash flow for 10 years as follows:

• Pessimistic: $184,000
• Neutral: $761,500
• Optimistic: $1,339,000

If you are interested, the Excel sheet with the workings of the cash flows is attached here:Net cash flow workings. (Note: this an optional reading: skipping this file will NOT affect your answers or grades). To assess the viability of this project, you have decided to utilize the capital budgeting techniques you learned in your MBA study. For this purpose, the finance analyst recommended a 10% required rate of return based on the weighted average cost of capital (WACC) of the firm. Moreover, the company has an increasing debt ratio in the past five years as below:

2. What is the current cash conversion cycle of the company? What does it tell?
4. What are the impacts on the operating cycle and cash conversion cycle due to the increase in the payment period (i.e., average collection period) from 10 to 30 days?

Answer rating: 100% (QA)

we can analyze the impact of the planned change in payment terms Cash Conversion Cycle CCC Formula CCC DIO DSO DPO DIO Days Inventory Outstanding miss... View the full answer