Report on Strategic Financial Decisions

Write a 2500-word report based on the given financial scenario and financial information provided. Conduct the strategic financial analysis using the information provided and the appropriate techniques, tools and frameworks. Make decisions and recommendations based on the analysis, considering all relevant implications, challenges and limitations.

Learning outcomes

1. Demonstrate understanding of core contemporary financial management theory, techniques and practice.

2. Critically evaluate and effectively communicate recommendations to address financial management issues.

3. Apply financial management theory and techniques to professional practice in an ethical manner.

Task

Context

The Capstone Assessment follows on from the financial review of Cochlear Ltd undertaken in the First Assessment.

Cochlear Ltd understands that these days, expanding business online is not a choice but is a necessity. To overcome the challenges stemming from the COVID-19 situation, Cochlear Ltd's management team have brainstormed different options with the objective of maximising their value. It is expected that with the online presence, demand for their products would increase as more and more consumers would be able to access it. Recently you joined Cochlear Ltd. As part of the management team, you have been asked to investigate the viability of the different options.

The marketing department has done intensive research and suggested an aggressive 5-year marketing strategy whereby the credit terms to all customers will be relaxed from 30 days to 45 days, in conjunction with other marketing campaigns across Africa, Asia, and Latin America. This campaign will involve an additional marketing fixed cash expense of $160,000 per year and is expected to generate additional sales of 4,000 equipments per year.

To accommodate the extra demand created by the marketing campaign, Cochlear is comparing two mutually exclusive investment projects. The two projects A and B are outlined below.

The Project A is less risky as it would involve the expansion of existing facilities and requires an initial investment of $1Million. The Project B involves higher investment of $ 1.5 Million but reduces the current variable cost of production. Both investment projects would have a five-year usable life and would be depreciated over their life using the straight-line depreciation method (assuming no salvage value). The total annual additional fixed cost will be the sum of marketing fixed cash expense of $160,000 per year (mentioned above) and annual depreciation (a non-cash expense) for each project.

The production manager has produced estimates for the costs associated with the manufacturing of the product. The current variable cost of producing one equipment is $405, which would remain the same under Project A but is estimated to fall to $300 per equipment in the case of Project B. The total variable cost includes raw material, labour and other production costs. The selling price of the equipment is $650.

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