Owen, Edward, Charles and Daniel inherited a small family business from their parents John and Mary Jones
Question:
Owen, Edward, Charles and Daniel inherited a small family business from their parents John and Mary Jones in 2013 and changed its name from Jones and Sons to Jones Brothers Marble Works (JBMW). The business produces high-quality natural stone tiles from limestone, marble and travertine and is located in Brisbane. The beauty of their natural stone products is unmatched and suits all tastes and budgets. Although their products are limited to indoor floor tiling the business has recently grown and has become extremely profitable. Limestone tiles are the stone of choice for elegant projects - the soft look and smooth feeling surface is the main reason for the popularity of this material. Marble is formed from Limestone through a heat process and when it contains limestone it is yellow, and green if it contains serpentine and red if it contains haematite. Marble is ageless and has been used for thousands of years due to its natural beauty and its strength and resistance to fire and erosion and is used for interior flooring and paving fireplaces and staircases. Travertine, has been used in building since ancient times and its warmth and classic simplicity makes it suitable for use in all rooms.
- Daniel decided that the projections should cover a 10-year period and should be completed in constant dollars as inflation was not expected to be significant. Based on the expected market return for such risky projects he also decided that the project should achieve a real rate of return of 20%.
- The administration costs were expected to increase by $15,000 per annum with the introduction of the internal diversified range and the Hotel Project. It is not expected to decrease when the Hotel project ceases as sales of the new internal range would increase. Introducing the external range would increase the administration costs by $10,000, when it is added to the production line.
- Daniel also estimated that additional inventory costing $30,000 would be required at the start of the project. Raw materials were estimated at 30% of sales for all goods while factory expenses are estimated at 10% of Sales for the internal range and the hotel renovation project. The factory expenses are estimated at 20% of sales the external range.
- Increased wage costs are estimated at $120,000 for the first 3 years then increasing by $180,000 to a higher level from year 4 onwards to cover the external range.
- Daniel plans to estimate as a minimum the NPV, IRR and a Payback period for the project.
- Daniel was a little concerned regarding the depth of the market research to support the proposed diversification and the extension due to the short time in which it had been conducted. He was more confident regarding the Hotel Chain project as all JBMW had to do was deliver according to a contract for revenues of $600, 000, in each of the 3 years.
- Daniel estimated that the new equipment which would cost $70,000 could be depreciated over 7 years with a scrap value of $3,500 at the end of 10 years even though according to Charles the equipment was very robust and would last for more than ten years. The new building would cost $140,000 and would be depreciated at 7% per annum on a straight-line basis. The building was expected to add little value on the sale of the land and therefore written down to zero value in 10 years.
- The company pays tax at a rate of 30%.
- Daniel had negotiated an interest only loan that would cost JBMW on average $18,000 a year in interest charges over the 10 years to fund the expansion. At the end of 10 years the loan would be fully paid up from internal funds.
You are to prepare the following:
- An executive report making a firm recommendation (accept/reject) the planned expansions. The executive summary must contain concise reasons for your recommendation and a summary of your financial analysis.
- Readable spreadsheets clearly showing at least the minimum financial analysis required by the accountant and report as detailed under Assessment 2 Section 3 on vUWS . You should also address the sensitivity of the project to his concerns and any additional analysis if you believe it supports your recommendation.
Other factors the firm should consider. Here you should be able to specify any further factors arising from your sensitivity analysis which the company might have overlooked or other factors that should have been taken into consideration in approving the planned expansions.
Business Law The Ethical Global and E-Commerce Environment
ISBN: 978-0071317658
15th edition
Authors: Jane Mallor, James Barnes, Thomas Bowers, Arlen Langvardt