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A Capital Budgeting Case - EcoVero - Corporate Social Responsibility - Accounting Assignment Help
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QUESTIONS
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Task: 1 Here comes the less known (and better?) territory: A capital budgeting case With competition and changes in consumer behaviours (including growing awareness of environmental issues), an economic rent (e.g. a positive NPV investment/project) cannot last forever. In fact, changes occur more rapidly in the more recent business environment. Established in 2005, Sustainable Alternate Fabric Incorporation (SAF) is a small-sized manufacturer of Viscoes (or Rayon) fibres (that are then made into threads ready for making clothes). As a cheaper and more durable alternative to silk, Viscoes has been in high demand by global fashion brands such as Zara, H&M, and the alike. In the past, the use of Viscoes was considered more sustainable than cotton or polyester as it is semi-synthetic fibres made from fast-growing regenerative trees such as beech and pine, among others. Only until very recently, the more scrutinizing world community has taken a closer look at how sustainable Viscoes really is. And the answer is not that pretty. Viscoes manufacturing actually has led to the heavy use of Sodium Hydroxide (caustic soda) and Carbon Disulphide - a highly polluting process. It is also criticized for partly contributing to rapid depletion of the world’s forests (endangered and ancient forests making way for commercial plantations). The list goes on. Despite the undying (just yet) and reasonably stable demand for Viscoes, the above has urged SAF’s management to explore alternative semi-synthetic fibres that can be the thing of the future. A new material called ‘EcoVero’ has caught their attention. Instead of relying on less sustainable wood as in the case of Viscoes, the new technology on EcoVero allows manufacturers to utilize the types of wood that are certified by sustainability authorities such as Forest Stewardship Council. Importantly, chemicals used in EcoVero production are almost reusable (50% less emissions). The catch is such new technology and equipment are relatively expensive for being a rather new innovation (but still cheaper than silk or wool clearly). Having mentioned so, SAF’s management also acknowledges that the market for (more) organic apparels is known for having the higher profit margins (e.g. a niche that is less sensitive to prices). In business, being first is everything. The management team of SAF has asked you, a financial consultant, to evaluate the proposal to expand its manufacturing into EcoVero. First stop, the existing Viscoes facility is now operating at its 95% capacity. At the same time, the demand for Viscoes is conservatively predicted to reduce slowly at least in the next five years (1% per year). Unfortunately, the rest of capacity (5%), as well as floor space and utilities in place will not be suitable in facilitating the expansion into the new project (EcoVero production). In fact, the company will need to rent a bit more expensive facility in the near neighbourhood for the next five years and this will push to total building lease for the whole company to $900,000 per year. Some of the existing office furniture at the Viscoes facility can be used at the new site. However, new EcoVero technology equipment (including technologies and license) worth $3,600,000 will need to be acquired to establish this new line of operation. Variable costs in producing EcoVero are estimated as 45 % of its sale revenues. SAF’s finance department has given a preliminary assessment on the viability of EcoVero project as follows:
QUESTIONS
- Calculate the relevant cash flows of the EcoVero project for each of the five years to be used in your capital budgeting analysis. Also assume that the $3,000 moving, and decoration cost can be written off immediately.(Tips: In designing the Excel template for this question, please make sure that you consider Question 3 below. That is, you need to link the ‘% variable cost of EcoVero (e.g. 45% as the base case)’ cell to your cash flows and thus NPV calculations.)
- Based on estimated cash flows in Question 1 above, calculate the NPV,IRR, and Discounted Pay Back Period of the EcoVero project. Here, please assume that the risk of the new line of business is the same as the average risk of SAF’s operations. Based on the numbers you calculate, will the acceptance of the EcoVero project add value to the company? Use Microsoft Excel for all your calculations. Make sure that you also make use of ‘NPV’ and ‘IRR’ functions in Excel.
- Continuing on from Question 2, find the percentage of variable costs (on EcoVero sales) that provides the financial breakeven point. (use Goal seek function in Excel)
- Describe three possible ways/channels by which CSR can add to the firm value. Among three of which, choose one that should be most applicable (or especially important) in the NZ context in your opinion (also provide solid justifications/elaborations to back up your position)
- Based on Ding et al (2018) article findings, how should you go about mentioning CSR for the publicly listed company that you manage (that are suggested (more of ‘implied’) by the authors’ findings on New Zealand companies)?
- In your own words (and thoughts), provide possible reasons why words such as ‘sustainability’, ‘responsibility’, ‘social and diversity’ may not be associated with firms’ profitability in the New Zealand context.
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