Rob’s Furniture Restoration Ltd (RFR) is a furniture restoration business located in the north of Sydney in Hornsby. The business was started by Rob in the 2006 and is now run by Rob and his partner Meredith. Rob and Meredith each own 35% of the issued ordinary shares in the company with the balance owned by Rob’s sister. The company’s Board of Directors consists of Rob, who is Managing Director, Meredith and Sarah (Rob’s sister) who is the company secretary. Sarah works in the business as the Accountant/Office Manager and has recently completed a Master of Finance at UTS.
The business has been through some difficult times in recent years mainly due to the ability to purchase new furniture cheaply from some of the international companies such as AEKI. They have survived by expanding their business to include making custom designed furniture. On top of this they have built up a good reputation for high quality craftsmanship and finishes.
The company operates from premises in Hornsby that it has owned since the business was incorporated. They are currently renting extra space in Asquith to produce the custom made furniture. The rent for this premises is $85,000 p.a.. They are considering consolidating their two premises into one larger one which would require them to sell their current one in Hornsby, cancel the lease on Asquith and buy new premises in nearby Mount Colah. The cost to cancel the lease early will be $7,000 and is tax deductible at the time of the expense. The maintenance costs are likely to increase, currently they are paying $4,800 p.a. and expect this to rise to $11,500 (in the first year) p.a.. It is anticipated that these will increase by around 2% p.a. over the next five years, (the existing would also have risen by this 2% p.a.) as shown in Appendix 1 (this 2% increase already included in these estimates).
Rob and Meredith have asked Sarah to investigate the feasibility of expanding the business more permanently into the new premises. Rob and Meredith have just completed an overseas trip (a combination of work and holiday) during which they met with the Managing Director of Omod to discuss working with them in their Australian operations. The trip was very expensive and it 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 $21,500. On returning from the trip Rob and Meredith met with Sarah to outline what they have discussed.
They believe with new production equipment they could expand their operations to include furniture repairs for Omod’s furniture which is sold in Australia. Moving to the new proposed premises in Mount Colah would enable them to do this expansion more easily than their current spread over two premises and suburbs.
They firmly believe that RFR would be able to take on take on this expansion without affecting the high quality products currently provided to the existing clients. Rob tabled a projected revenue forecast for the expansion. The forecast revenue is detailed in Appendix 1. He also outlined some preliminary estimates on the costs involved. The new premises would cost about $2,430,000 to purchase. Another large cost would be the new equipment they wish to purchase for increased quantity of repair expected from the business from Omod. They have a firm quote from a local company and the total cost including all shipping, installation and testing would be $260,000.
Rob was very excited and said they would like to see the company at least double its revenue in the next three years. Sarah argued that the company was profitable and provided a good return at the moment and a larger company may bring more problems. She felt that Rob and Meredith had not considered the extra staff that would be needed to work in the new premises. It was anticipated that three new staff would be required and that all the staff, the new three plus the existing four, would require training on the new equipment. This training would cost $8,000 per staff member and would have to be undertaken before the equipment could be implemented. The new staff wages would be $74,700 p.a. each in line with the current staff wages. It was also agreed that an allowance would be made in the analysis for all wages to increase by 2.5% p.a.. Details of the agreed wages per staff member are shown in Appendix 1 (the 2.5% increase is already included in these estimates).
The current premises is quite valuable and a local company has recently offered $1,085,000 for it. Sarah firmly believed that this is an extremely good offer and if they decide to move they should accept it. Due to the cost base and other issues there would be no tax implications on this sale. Meredith was a bit 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. Rob emphasised that Sarah had the skills to assemble all the data required and write a report and that they should meet in about a week to make the decision whether to move and make the expansion or not. A summary of the data presented at the meeting and any relevant discussion is shown below:
- It was agreed that the sales figures presented by Rob as shown in Appendix 1 would be used in the analysis. Sarah 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 Rob and Meredith.
- The quote for the equipment had been confirmed in writing. The tax office had confirmed that the $8,000 per staff member for training would be a tax deduction at the time the amount was paid although Sarah said the company did have the opportunity of spreading this cost and about 30% of the cost of Rob and Meredith’s overseas trip over ten years for accounting purposes.
- Sarah has told Rob that there is old equipment held in the current premises that could be used in the new one. Although several years old they are fully depreciated and the new project could have them at no cost. The equipment had recently been appraised for insurance purposes and had a market value of $18,000.
- Sarah has analysed the cash flow and the company would have to borrow $2,500,000 to finance the project. The bank has given preliminary approval but want to see a final business plan. The interest rate would be 5.25% p.a. compounding monthly and the loan will be repayable over 10 years with a monthly repayment figure of $26,822.93.
- The company pays tax at a corporate tax rate of 30%.
- Martha believes that the current weighted average cost of capital for the firm of 11% is appropriate to use to analyse the new project as it is in the same risk level as their current business operations. Inflation is already included in all the revenues and expenses.
- Land is not depreciable and no capital gains tax will apply. In five years it is estimated that the new premises could be sold for about $4,250,000. The tax office has determined that the building, which is valued at $950,000, can be depreciated at 7% p.a. straight line based on cost and the equipment has a depreciation rate of 20% p.a. straight line.
- In five years the new equipment would only have a scrap value of $75,000 while the old reused equipment would have no value.
- There would be an increase in inventory of common spare parts estimated to be 6% of the following years’ revenue.
You have been asked to assist Sara hand are required to submit the following;
- An executive summary making a firm recommendation to Rob’s Furniture Restoration Ltd to expand the business as outlined or not. 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). ( 5 marks)
- Readable spread sheets clearly showing the NPV of the project and all other calculations that are used to support your decisions. (15 marks)
Case studies may be handed in during your lecture during the week commencing 23 May, 2016 or in the box on Level 1, Block C, Building 5, Markets Campus, UTS by 5pm Friday 27 May, 2016. The assignment box is marked FINANCE 1. Please ensure you put the attached cover sheet on your assignment, only one case study per group to be handed in. Any questions regarding the case study should be put in the Case Study Forum of the Discussion Board on the UTS Online site. Good Luck.
Rob’s Furniture Limited
Revenue Forecast $
|Year 1||Year 2||Year 3||Year 4||Year 5|
Wages Forecast $
|Year 1||Year 2||Year 3||Year 4||Year 5|
|Wages per employee||74,700||76,568||78,482||80,444||82,455|
Maintenance Forecast $
|Year 1||Year 2||Year 3||Year 4||Year 5|
Photocopy the cover and attach it to the front of your submission for this subject.
25742 Financial Management Cover Sheet
Case Study Autumn Semester 2016
Due: Case studies may be handed in during your lecture during the week commencing 21 May, 2015 or in the box marked FINANCE 1 on Level 5, Building 8, UTS by 5pm Friday 27 May, 2015.
We, the undersigned, have carefully read, understood, and have taken into account all the requirements and guidelines for assessment and referencing in the subject outline. We affirm that this assignment is our own work; that it has not been previously submitted for assessment; that all material which is quoted is accurately indicated as such; and that we have acknowledged all sources used fully and accurately according to requirements. We are fully aware that failure to comply with these requirements is a form of cheating and could result in disciplinary action.
|Student Surname||Student First Name||Student No.||Lecturer|
Or day & Time
|Signature and Date|
|1. Group coordinator:|
Student name must be the same as appears on your student card, surname first.
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