Grey’s Point Business Solutions: Revenue Forecast- Business Case Study Assignment

Internal Code: 1HBAJ

Business Case Study Assignment:

Task: Based on the case study below & Attached PDF Appendix for Costs,we are required to submit the following 2(two taskes) 1. An executive summary making a firm recommendation to Grey’s Point Business Solutions to sell the land or expand the business on this site. The executive summary must contain concise reasons for your recommendation and a summary of your financial analysis. The executive summary should be a maximum of two A4 pages (single space 12 font). (100-200 words fine) ( 5 marks) 2. Readable spread sheets clearly showing the NPV of the project and all other calculations that are used to support your decisions. (15 marks) CASE STUDY: Grey’s Point Business Solutions Pty Ltd (GPBS) is a warehouse business located in the southern suburbs of Sydney. The business was started by two friends in the late 1950’s but is now run by Carol Smith and Jacob Robinson who purchased the business in 1995. Carol and Jacob each own 30% of the issued ordinary shares in the company but several other family members also own shares and the company is expected to perform well and pay annual dividends. The company’s Board of Directors consists of Carol, who is Managing Director, Jacob, Dave Smith and Maria Robinson who is the company secretary. There is one independent director and he is Lei Tran a family friend and the family tax accountant. Maria works in the business as the Accountant/Office Manager and has recently completed an MBA at UTS. The warehouse business has been through some turbulent times in recent years mainly due to the increasing dominance of the larger Australia wide companies. GPBS has survived and managed to remain profitable through the changes in the industry and is now associated with a large relocation company which has ensured a steady amount of new clients. On top of this they have built up a good reputation for clean and spacious warehouse facilities with good security. The company operates from premises that it has owned since the business was incorporated. At the time of incorporation two adjoining blocks of land were purchased with the warehouse and office on one block and the other remains undeveloped. During the years the buildings have been renovated and updated several times with the last occasion being only eighteen months ago. The other block is still vacant, not very securely fenced and has to be maintained by one of the local lawn mowing contractors to keep the grass and shrubs tidy. This maintenance currently costs $16,000 p.a. and is expected to remain at that level for the next three years when it is likely to increase by 3% p.a. for the next two years. This expense will be eliminated if the site is developed. For some time now Carol has been advocating selling the land as it would release a significant amount of money which could be paid out to shareholders as a special dividend. However Jacob has always had a dream that the land would be used to expand the business and is not keen to sell. The company is working at full capacity and it is not unusual to have to turn away some potential customers. The company has mostly small sized spaces in the warehouse which are usually used by families for short or long term furniture storage. The company has had some requests recently for larger spaces for businesses to store goods between purchase and sale. Some months ago Jacob had asked Maria to investigate the feasibility of expanding the business with another warehouse facility. Jacob has just completed an overseas trip (a combination of work and holiday with his wife and family) during which he completed some research into the latest warehouse techniques used in Europe. He had also studied the latest techniques for packing and retrieving goods in a warehouse. The trip had been very expensive and it had cost $37,500 for airfares, accommodation and meals. As most of the trip was business the company has paid for the work related expenses of $17,500. On returning from the trip Jacob met with Carol and Maria to outline an idea that he had been considering for some time. Jacob stated at the meeting that he believed that if the company added a warehouse on the vacant block they would be able to significantly increase business particularly in the storage of goods for large businesses. He firmly believed that GPBS would be able to take on more warehouse business without affecting the service currently provided to the existing clients. Jacob tabled a projected revenue forecast for both the historical warehouse business and the increased work. The forecast revenue is detailed in Appendix 1. He also outlined some preliminary estimates on the costs involved. The new warehouse would cost about $560,000 to erect. Another large cost would be the equipment required to load the goods into the warehouse and retrieve it. He had a firm quote from the German company and the total cost including all shipping, installation and testing would be $350,000. Jacob was very excited and said this was just what he had anticipated and would like to see the company at least double its revenue in the next three years. Both Maria and Carol were less enthusiastic. Maria argued that the company was profitable and provided a good return to the family particularly those that work in the company. A larger company would only bring more problems and Jacob had not considered the extra staff that would be needed to work in the new premises. The land was very valuable and a local company had recently offered $235,000 for the block. Maria firmly believed that the company should take the money and carry on the business at current levels of activity. At this Jacob got angry and stated that the land had only cost the equivalent of $5,000 which is next to nothing and was bought for the company to expand. He stated selling the land is not to be considered and the market value is not relevant. Carol was more restrained and stated her concern was the level of investment required and raising the cash. The company certainly did not have any spare cash. The company had borrowed the amount required for the last renovations and were still making payments on the term loan from the bank. In the current climate she was concerned that additional finance of that magnitude would be difficult to obtain from the bank. She felt that a proper business plan should be produced and a short report prepared for all board members and the full Board should make the final decision. Carol emphasised that Jacob and Maria should work as a team and assemble all the data required to make the decision and meet in about a month to agree on the base data to be included in the analysis. A summary of the data presented at the meeting and any relevant discussion is shown below: 1. It was agreed that the sales figures presented by Jacob as shown in Appendix 1 would be used in the analysis. Maria however was concerned whether the new business would be gained. She believed that this revenue should be excluded from the analysis but had been overruled by Carol. 2. The quote for the German machine had been confirmed in writing but they had also included an additional offer to train key staff to use the new technology which would cost $35,000 which GPBS would take up. This would occur prior to the commencement of commercial operations and would involve a supervisor travelling to Germany. The tax office had confirmed that the $35,000 would be a tax deduction at the time the amount was paid although Maria said the company did have the opportunity of spreading this cost and about 20% of the cost of Jacob’s overseas trip over ten years for accounting purposes. 3. The number of employees would be increased. At the start of the new business a new supervisor would be required for the new area. One of the current employees will be promoted. The increase in wages cost of his promotion including all on-costs will be $16,000 p.a. His current position in the current building would have to be replaced at a total cost per annum of $65,000. It was also agreed that an allowance would be made in the analysis for all wages to increase by 3% p.a. Details of the other agreed changes in wage costs are shown in Appendix 1 (3% increase is already included in these estimates). 4. Increased building maintenance costs are shown in Appendix 1. 5. Carol has told Jacob that there is old equipment held in the current warehouse that could be used in the new warehouse. Although several years old they are fully depreciated and the new project could have them at no cost. The tools had recently been appraised for insurance purposes and had a market value of $10,000. 6. Maria has analysed the cash flow and the company would have to borrow $800,000 to finance the project. The bank has given preliminary approval but want to see a final business plan. The interest rate would be 7.25% p.a. compounding monthly and the loan will be repayable over 7 years with a monthly repayment figure of $127,069.25. 7. The company pays tax at a corporate tax rate of 30%. 8. Maria’s research determined that a return of 15% on an investment of this type is appropriate. 9. Land is not depreciable and no capital gains tax will apply. In five years it is estimated that the land could be sold for about $336,000. The tax office has determined that the building can be depreciated at 7% p.a. straight line based on cost and the moving equipment has a depreciation rate of 20% p.a. straight line. 10. Carol has asked that they take a conservative approach and that the project be analysed over five years. 11. In five years the new equipment would only have a scrap value of $10,000 while the old reused equipment would have no value. The building is estimated to be worth $100,000 of the total land value in five years’ time. 12. There would be an increase in inventory of common spare parts estimated to be 10% of the following years’ revenue.