Operating

The Inventory Manager is considering introducing a new product to Sheffield Limited - the Sheffield soil test kit. The kit would sell for $400 per unit, have variable manufacturing costs of $120 per unit, and variable selling costs of $40 per unit. Market analysis suggests Sheffield Limited could sell 200 units per month. The company's monthly fixed expenses are $36,000. The tax rate is 30% and Sheffield Limited have a targeted before-tax profit for the product of $16,000 per month.

Investing

At a recent trade fair that you attended, you were impressed with a new machine, Windwhistle model 230E, that can double the production capacity of your flagship product, Cropmaster 18 Fertiliser. The machine requires a capital outlay of $500,000 and will have a residual value of $25,000 at the end of its six-year useful life.

It is expected that the new machine will generate the following cash flows:

0 1 2 3 4 5 6

$(500,000) 90,000

185,000 160,000 145,000 90,000 90,000

Initial Inv. 25,000

You have obtained information on the payback Period policy of an investment set by management of Sheffield Limited and the other information for investment in the new machine, Windwhistle Model 230E as below:

Investment decision Decision criteria set by Outcome for investment in technique management Windwhistle model 230E

Payback Period (PP)

Not more than 3 years

3.11 years

Net Present Value (NPV)

Positive NPV

$92,276.33

Internal Rate of Return (IRR)

Not less than 9.0%

16.07%

Financing

Assuming you have decided to invest in the Windwhistle model 230E, you now need to decide how to finance the investment. You have two options of financing for the purchase of the new machine. The first option is by taking up a long-term loan from a bank. The second option is through equity financing from the shareholders.

In addition, Sheffield have identified four potential suppliers of the required chemical needed to produce the Cropmaster 18 Fertiliser that uses the Windwhistle model 230E. Each of the suppliers offer different credit terms as below;

Supplier

Cash discount

Cash discount period

Credit period

Beginning of credit period

A

2.0%

15 days

30 days

Date of invoice

B

1.5%

10 days

60 days

End of month

C

3.0%

7 days

45 days

Date of invoice

D

3.5%

15 days

30 days

End of month

The investment in the new machine, Windwhistle Model 230E will have a significant impact on the financial position of Sheffield Limited for its financial year ending 31 December 2020.

Despite a sales drop of 24% from 2018 to 2019, Sheffield Limited turn from a net loss of $132,700 to a net profit after tax of $698,520. The Board of Directors is pleased with the performance of the company in 2019 but is also puzzled as to how the company can turn to profit although the sales dropped from the previous year. The Chief Financial Officer of the company made projections of the balance sheet and income statement of the company for its financial year ending 31 December 2020. The historical figures for 2018 and 2019, and the estimated figures for 2020 (shown as 2020e) are presented below:

Sheffield Limited

Comparative Balance Sheets as at 31 December

Assets

Cash

2018 Actual ($)

2019 Actual ($)

2020e

Estimated ($)

7,300

7,500

8,000

Short-Term Investments

18,500

46,600

48,600

Accounts Receivable

650,000

350,000

351,200

Inventories

Total Current Assets

Fixed Assets at cost

1,283,860

713,000

715,200

1,959,660

1,117,100

1,123,000

1,201,350

490,500

491,000

Less: Accumulated Depreciation

Fixed Assets

Total Assets

Liabilities And Equity

Accounts Payable

261,860

144,700

146,200

939,490

345,800

344,800

2,899,150

1,462,900

1,467,800

323,550

145,400

145,600

Notes Payable

699,700

198,200

200,000

Accruals

Total Current Liabilities

Long-Term Debt

283,510

132,700

135,000

1,306,760

476,300

480,600

980,000

322,000

323,432

Common Stock

460,000

540,000

460,000

Retained Earnings

Total Equity

Total Liabilities And Equity

152,390

124,600

203,768

612,390

664,600

663,768

2,899,150

1,462,900

1,467,800

Sheffield Limited

Income Statement for the year ended 31 December

Sales

2018 Actual ($)

2019 Actual ($)

2020e

Estimated ($)

5,831,300

4,429,200

4,432,000

COGS excluding depreciation

4,975,800

2,860,500

2,864,000

Depreciation

116,600

18,500

18,900

Other Expenses

Total Operating Costs

EBIT

698,000

325,000

340,000

5,790,400

3,204,000

3,222,900

40,900

1,225,200

1,209,100

Interest Expense

EBT

173,600

61,000

62,500

(132,700)

1,164,200

1,146,600

Taxes (40%)

Net Income

-

465,680

458,640

(132,700)

698,520

687,960

The financial ratios of the company in 2018 and 2019, and the estimated figures for 2020 (shown as 2020e) are presented below. The financial ratios of the agriculture products industry in New Zealand is included for comparison purposes.

Sheffield Limited

Ratio Analysis

for the year ended 31 December

Category and ratio 2018 2019 2020e Industry

Actual Actual Estimated Average

Efficiency Ratios

Inventory Turnover

3.88 times4.01 times

4.00 times

5.00 times

Average Age of Inventory

94.18 days 90.98 days

91.15 days

73.00 days

Average Collection Period

40.69 days 28.84 days

28.92 days

30.00 days

Average Payment Period

23.73 days 18.55 days

18.56 days

60.00 days

Fixed Asset Turnover

6.21 times12.81 times

12.85 times

9.00 times

Total Asset Turnover

2.01 times3.03 times

3.02 times

2.50 times

Financial Stability Ratios

Current Ratio

1.50 times2.35 times

2.34 times

2.00 times

Quick Ratio

0.52 times0.85 times

0.85 times

1.00 times

Debt Ratio

0.79 times0.55 times

0.55 times

0.40 times

Debt to Equity Ratio

3.73 times1.20 times

1.21 times

0.70 times

Times Interest Earned

0.24 times20.09 times

19.35 times

25.00 times

Profitability Ratios

Gross Profit Margin

14.67%35.42%

35.38%

27.00%

Operating Profit Margin

0.70%27.66%

27.28%

16.00%

Net Profit Margin

-2.28%15.77%

15.52%

12.00%

Return on Total Assets

-4.58%47.75%

46.87%

30.00%

Return on Equity

-21.67%105.10%

103.64%

35.00%

1.Analysis - Operating Decision: Should Sheffield Limited introduce the 'Sheffield Soil Test Kit'

2.Analysis - Investing Decision: Should the capital expenditure proposal to purchase a new machine, Windwhistle model 230E that can double the production capacity of your flagship product, Cropmaster 18 Fertiliser be accepted

3.Analysis - Financing Decisions: Which is the better option for financing the new machine - long-term loan from a bank or equity financing from the shareholders? Who should be the preferred supplier for the required chemical needed to produce the Cropmaster 18 Fertiliser

4.Analysis - Financial Statement Analysis: What actions could be taken to improve the performance of Sheffield Limited in each of the categories of financial ratios (efficiency ratios, financial stability ratios, and profitability ratios)

5.Analysis - Overall: What should be the future direction of Sheffield Limited? How can Sheffield Limited remain competitive amidst the Covid-19 pandemic that is expected to have a significant impact on the financial performance of the company