Sheffield limited is situated in central Canterbury. It is a nutrient and environmental organization. The company’s main focus is to help farmers in New Zealand’s southern island have efficient production with reduced environmental impact. In achieving efficiency for farmers, the company has introduced a new product known as the Sheffield soil test kit. Sheffield limited will sell the kit at $400 per unit. The variable manufacturing cost of the kit will be $120, whereas the variable selling cost will be $40 per unit. The company projects selling 200 units in a month. The company also projects the fixed expenses to be $36000 per month. The company focuses on making a profit of $16000 per month before the tax, which is rated at 30%. Equally important, Sheffield limited is focusing on investing in the Windwhistle model 230E, which is essential in doubling the amount of Cropmaster 18 fertilizer produced.
The company requires an initial investment of Windwhistle model 230E is $500000. The machine has a salvage value of $25000 at the end of its useful life. The useful life of the machine is six years. For the company to acquire the machine, it is considering getting the finances from equity of shareholders or a long-term loan from a bank with the expected returns considered to be having a positive effect on the Sheffield limited financial position. The analysis of the cash flow reveals a positive net present value. From the analysis the payback period is 3.11 years compared to the conventional three years. 16.95% is the internal rate compared the conventional one, not less than 9%.
Even though the company experienced a drop in sales of 24% from 2020 to 2021, in 2021 the company managed to experience a net profit of $698520, which was an achievement for the company since in 2020, the company experienced a loss of $132700. The main attribution to the profit the company experienced in 2021 is the dropping of the operating costs. In 2020, the operating cost was $5790400, whereas, in 2021, the operating cost was $3204000 reflecting a significant drop. The 2022 projected profit of the company is $687960. Comparing the company’s projected profit against the industry’s average, the company appears to be more profitable as its profit is projected to be 35.38% against that of the industry average, which is 27%. It is also worth noting that the net projected profit margin of the company is 15.52%, whereas the industry average is 12%. The company’s projected return on the total asset is 46.87%, and that for the industry average is 30%. Also, the projected operating profit of the company is 27.28%, and the industry average is 16%.
Sheffield limited will sell the soil test kit at $400 per unit. The variable manufacturing cost of the kit will be $120, whereas the variable selling cost will be $40 per unit. The company projects to sell 200 units in a month. The company also projects the fixed expenses to be $36000 per month. The company focuses on making a profit of $16000 per month before the tax, which is rated at 30%. Considering that the company is targeting to sell 200 units per month, this implies that the company should have a revenue equals to multiplication of the number of units with the price of one unit, which will be 200 x $400 totaling $80,000 per month out of sales. On the other side, the total variable costs per unit are $120, which implies that the total variable costs for 200 units will be 200 x $120, amounting to $24000. Also, additional variable selling costs are $40 per unit, thus implying that for 200 units, the total variable costs will be 200 x $40, amounting to $8000. Therefore, the total variable cost will be $24000 + $8000 = $32000. both variable costs and the fixed costs are included total costs. Thus, to get the total costs, total fixed costs are added to variable costs, which are $36000 plus $32000, amounting to $68000. The gross profit Sheffield limited can generate is deduced by deducting total costs from the gross revenue, which will be $80000 – $68000 = $12000. To get net profit after the tax is subtracted from the gross profit. The payable tax will be 30% of the total gross tax, which will be 30% of $12000, bringing $3600. Thus, total net profit will be $12000 – $3600 = $8400. This indicates that the kit will attract a profit of $8400 per month, and therefore the company should introduce this product since it will enhance its profitability.
Sheffield limited is focusing on investing in the Windwhistle model 230E, which is essential in doubling the amount of Cropmaster 18 fertilizer manufactured. To have the machine, the company needs an initial capital investment of $500000. The machine whose salvage value is $25000 after six years of its useful life. The analysis also reveals that the payback period is 3.11 years compared to the conventional three years. The payback period is when the company takes to recover its initial investment fully. This is when the company’s investment takes to reach the break-even point in which there are no losses and profit to its acquisition. Through this principle, the company takes longer than required to recover its investment.
With the aid of the net present value formula, it is determined that the machine brings a positive present net flow of $92276.33 afterwards its useful life of 6 years. The approach The net present value is a technique used in budgeting through which free future cash flows are cut-rated at a fixed rate, after which they are summed up for all the periods as they are deducted from the initial investment (Gaspars-Wieloch, 2019). When the all the cash flows net present value is positive the development is profitable and viable. But if the net present value of all the cash flow is negative, the project is not profitable and viable. Since the net present value achieved by the machine is $92276.33, which is positive, then the machine will be profitable and viable for the company. Thus, the company should embrace Windwhistle model 230E, double its production capacity and increase profitability.
The internal rate is indicated to be 16.95% against the conventional criteria, which is not less than 9%. The internal rate of return is an approach explored in investment to determine its profitability (Hayes, 2019). In the net present value analysis, internal rate of return makes the net present value of all imminent free cash flows zero. Since 9% is the required internal rate of return and 16.95 being the actual internal rate of return brought by the product, the company should embrace the idea of investing on the machine since it exceeds the prospects of the management by 5.07%. In this analysis, it is evident that Windwhistle model 230E is beneficial as it is evident that it surpasses the expectations of two appraisal techniques. Thus the company should spend on it.
Since the initial investment of the wind whistle model 230E is high, it requires external financing to bridge the investment gap between either long-term loans from banks or equity financing from the shareholders. Considering that the debt to equity ratio of the company in 2021 was below the average industry, the total equity being $664600 and total debt $798000, the company will stand a chance of risking defaulting in loans if it happens to add more loans in an attempt to raise $500000. The best option the company should embrace in raising money for the investment of the machine is the equity from the shareholders. This will play a significant role in downscaling the chances of indebtedness, and at the same time, it will upscale the liquidity of the position as a result of a robust equity base. Equally important, acquiring finances from shareholders will be vital in spreading the risks involved in the circumstance that loss is made simply because the same way the shareholders share the profit is the same way they will share the loss. On the contrary, going the long-term route is hectic since both the principal and interest should be repaid irrespective of whether the company makes the profit.
Financial Statement Analysis
Considering that the company will acquire the finances for the investment of the machine from the shareholders, the company will not stand a chance of suffering from temporary liquidity issues that will compel littler periods of payment. In 2021 the company had a current ratio that was outwitting the industry average. Thus, the appropriate supplier for the chemicals for the manufacture of fertilizers should be the one with the biggest discount. Evaluating the four suppliers, supplier A’s cash discount is 2%, B’s cash discount is 1.5%, C offers 3% discount, and D offers a cash discount of 3.5% plus. For the company to realize a maximum profit, it has to embrace the reduced expenses on chemical inputs to manufacture the fertilizers. Therefore, the company should go for suppler D, which has the biggest cash discount of 3.5%. Choosing supplier D will mean a reduction of the expenses the company will use in manufacturing the fertilizer.
The efficiency ratio is the extent of the aptitude of the organization to use its assets while it manages its liabilities. In other words, the efficiency ratio is the extent of the aptitude of the company to utilize its assets in generating sales (D’Arcy, 2015). Sheffield limited can foster its efficiency ratios by intensifying the utility of its assets towards extreme productivity hence profitability. To achieve this, the company should ensure no asset is idle in connection to sales and production, considering that the inventory turnover is projected to be five times in 2022 as that of the industry average is five times.
On the other hand, the financial stability ratios signify liquidity ratios. These ratios determine how well the company is able to pay both long and short-term debts. For the company to improve its short-term liquidity with respect to the current ratio, it should pay the supplies in cash (D’Arcy, 2015). The company should equally finance its projects through equity from the stakeholders instead of loans from the banks as a way of improving long-term solvency with respect to debt to equity ratio and debt ratio. Also of significant importance, the company can improve its profitability ratio through the enhancement of its sales revenue (D’Arcy, 2015). This can be accomplished through aggressive selling to increase revenue and also through cost leadership in which expenses are reduced to maximize profitability.
Remaining Competitive Amidst of COVID 19 Pandemic
Despite the disruption in chain management worldwide as a result of the outbreak of the COVID 19 pandemic, Sheffield limited can remain competitive through having many supplies. The company can equally remain competitive by embracing a digitized supply chain process which will ensure the company is getting the prices for the raw materials hence ensuring saving (Gupta et al., 2020). Equally important, the company should also embrace strategic management and partnership, enhancing collective support (Kiss, 2020). a partnership is important in saving on costs since cost caring emanates from careful management of financial resources due to cost-sharing that occurs in a strategic partnership. Moreover, strategic partnership facilitates effective lobbying since bigger organizations can gain more grip in lobbying the government, which is not the case for smaller organizations. It is also worth noting that strategic partnerships can facilitate cost-saving salary expenditures.
As evident from the income statements, Sheffield united is headed towards profitability. In 2022, the profit is projected to be $687960 as opposed to the loss experienced in 2020. Nevertheless, the profit is seen to be dropping from that of 2021, in which the profit was $698520. The company can improve profitability by introducing a soil test kit that is projected to attract a profit of $16000 per month before tax deduction, hence increasing the profit and thus the net income of the company. The company requires to invest $500000 into Windwhistle model 230 E, which will see the company double the productivity of the company. The company equally follows cost leadership measures to continue being competitive amid the outbreak of the COVID 19 pandemic by widening the supplier base for a better price of law materials and embracing strategic partnership.
D’Arcy, Margaret. (2015). An Introduction to Financial Accounting, Chartered Accountants Ireland. ProQuest Ebook Central. http://ebookcentral.proquest.com/lib/lincoln- ebooks/detail.action?docID=5973837.
Gaspars-Wieloch, H. (2019). Project net present value estimation under uncertainty. Central European Journal of Operations Research, 27(1), 179-197.
Gupta, H., Kumar, S., Kusi-Sarpong, S., Jabbour, C. J. C., & Agyemang, M. (2020). Enablers to supply chain performance based on digitization technologies. Industrial Management & Data Systems.
Hayes, A. (2019). Internal Rate of Return–IRR.
Kiss, L. B. (2020). The Importance of Business Partnership on the World Wide Web.