ZXY Company is a food product company. ZXY is considering expanding to two new products and a second production facility. The food products are staples with steady demands. The proposed expansion will require an investment of $7,000,000 for equipment with an assumed ten-year life, after which all equipment and other assets can be sold for an estimated $1,000,000. They will be renting the facility. ZXY requires a 12 percent return on investments. You have been asked to recommend whether or not to make the investment.
In preparing and supporting your recommendation to either make the investment or not, include the following items as part of your analysis:
- Analysis of financial information.
- Identification of risks associated with the investment. Consider:
- How risky the project appears.
- How far off your estimates of revenues and expenses can be before your decision would change.
- The difference if the company were to use a straight line versus a MACRS depreciation.
- Recommendation for a course of action.
- Explanation of criteria supporting your recommendation.
Financial Information
As part of your analysis you might find that additional information from marketing, accounting, or finance would be useful in making an informed and well-supported recommendation. In a real workplace setting you would have the ability to ask for that information. However, for the purposes of this assessment, you can make assumptions about the values of that data or ratios in support of your recommendation.
Accounting worked with the marketing group to create the ZXY Company Financial Statements spreadsheet for the new products business and the new facility.
Notes about the financial information:
- The expense line labeled SQF FDA Mandates refers to the costs of complying with Food and Drug Administration requirements.
- Depreciation expense is calculated using 7-year life modified accelerated cost recovery system (MACRS).