URIKA CORPORATION – FINANCIAL PLANNING & ANALYSIS
Urika Corp. manufactures a variety of kitchen and dining
equipment from mixers and food processors to flatware, serving utensils,
cooking utensils, and other items for consumer and commercial use. Urika went public in 1984 at $27/share on the
market (netting $23/share for the firm) and began issuing dividends in 1990
without missing a year since then. Due
to their low debt and wise reinvestment of earnings, today the company’s stock
sells for $200/share.
As the company prepares for the next year, the President has
tasked the senior leadership with finding major expansion projects in order
take market share from industry leaders such as GE and Whirlpool’s subsidiary,
KitchenAid. Over the past 5 years, the
company has accumulated significant amounts of cash and other marketable assets
to fund this expansion without materially affecting the firm’s debt or diluting
the stockholder’s equity. The CFO has
determined $22,500,000 will available in the 2012 capital budget to fund these new
projects.
One project involves building the plant and equipment to equip
and supply a new up-and-coming restaurant chain, Fast ‘N’ Healthy, which has
been making great strides at competing with fast-food chains along the West coast,
and wants to re-equip and re-model existing stores and open 200 new stores
nationwide over the next four years. Mr.
Tony Estabal, Senior Vice President for Business Development at Urika is
certain Urika will secure the four-year contract with Fast ‘N’ Healthy due to
Urika’s previous successful work with the restaurant, their cost savings
measures, and their experience and reputation within the industry. To compete with other bidders, Urika is able
to provide some cost breaks to the restaurant chain for other kitchen and
dining supplies because Urika’s main plant is located near the restaurant
chain’s main distribution warehouse.
Even if Urika cannot under-bid competitors on price alone, other
value-added benefits such as their existing relationship, reputation in the
industry, and location would edge them over the competition. There is little to no risk of not securing
this contract; therefore, this project has been given a priority “green light”
status by the President and the corporation’s board.
PART 1 – PROJECT CBA
MODELING
Urika would need to invest an estimated $6,786,000 for plant
and equipment that would depreciate over 30 years. Although Urika would probably continue using
the plant and equipment for future endeavors and further expansion by Fast ‘N’
Healthy, Tony has been instructed to make sure this project can stand on its
own merits; therefore, a salvage or re-sale value for the Plant & Equipment
has been estimated at $4,875,000 to be used as part of the exit strategy at
termination of the contract.
Urika would also need to initially invest another $175,000
in working capital for materials. As the
restaurant chain expands, Urika would need to ramp up manufacturing so that Working
Capital is maintained at about 15% of Gross Revenues from the restaurant at the
end of each period. Likewise, Direct
Materials will cost about 15% of Gross Revenues. Since Urika hopes to continue this operation
after the four years, the company will plan on having $450,000 in working
capital at the end of four years, but this could be sold at book value if the
operations cease.
The operation of the equipment from start to finish is
expected to require six employees with a fully loaded (salaries, bonuses, benefits,
taxes, etc.) cost of labor (COL) at about $74,250/year each. Tony wants to plan for 3% annual increases in
the base COL.
Since this operation will be working at only about 50% of
capacity in year one, additional labor will not be needed for the full four
years of operations. However, by year
three, estimated overtime will add another $.145 (or 14.5%) of every $1 of
marginal revenue over $2.5M
to the total COL (in other words, overtime for up to $2.5M in revenue = $0, but
overtime for $2,500,001 is $0.145).
Overhead charged to the cost of goods sold will be assigned
at a rate of 4% of Gross Revenue.
Because success of the restaurant’s expansion can affect the
profitability as well as the scale of the projects, marketing analysts have
provided the following revenue forecast for Urika based on the restaurant
owner’s previous success and extensive market analysis. Mr. Estabal has asked you to weight Urika’s expected
revenue streams based on the following:

Your Assignment:
PART 1 – COST BENEFIT
ANALYSIS
Create a cost-benefit analysis model of the project based on
the above information to calculate the NPV and IRR to show that this project is
worth pursuing. Since any of the values and rates
provided above could change, make sure you provide a single point of input that
will re-calculate the results if any of the assumptions change, including the
estimate revenues and the probabilities of those revenues. You’ll also want to provide immediate
feedback of key results so that if a manager changes one variable, he or she
can immediately see the impact to key metrics.
Urika’s tax rate is currently 32% and their Weighted Average
Cost of Capital is 5.5%. Urika’s CFO
will not accept a project unless the IRR can hurdle 12%.
For this exercise, depreciate Plant & Equipment as if
there will be no salvage value on a straight-line basis.
PART 2 – SCENARIO
ANALYSIS
Using your model from above, now create a scenario analysis
report showing the yearly cash flows, NPV and IRR for the mutually exclusive
scenarios that follow:
Scenario
1: The Probabilities for Worst, Probable and Best change to 25%/50%/25%
Scenario 2: Working Capital is changed to 18%
Scenario 3: Overtime changes to a 25%
increase (vs. the 14.5%) per $1 of additional revenue
Scenario 4: P&E changes to
$8.5M
Scenario
5: The Ultimate Worst Case: all four of the above at once.
PART 3 – FINANCIAL
FORECASTING
Using the historical financial statements provided, create pro forma financial statements of Urika
Corporation using the following information for status quo operations and with the Fast ‘N’ Health project layered
in as well.
For status quo,
use the following assumptions or techniques:
1.
Grow sales by 7% annually
2.
Use the average percentage of sales to determine
the cost of goods sold for current operations
3.
Use the Excel function TREND to determine Cash
and SG&A using historical Sales as the independent variable (do not apply
this to sales including Fast ‘N’ Healthy since all of the SG&A costs are
already included in the project’s revenue stream).
4. Assume $120,000 as the current
portion of long term debt for all out-years.
5.
Use the current Cost of Capital to determine the
Interest Expense on debt.
6.
Use TREND to determine Accounts Receivable and
Inventories with Sales as the independent variable; for this calculation, DO
use total sales including revenue from the Fast ‘N’ Healthy project.
7.
Assume Other Current Assets are a flat $8M for
all out-years
8.
Include the project’s PP&E with the status
quo’s PP&E.
9.
Depreciation for status quo PP&E will be
$5,855,000 for all out-years. Don’t
forget to add depreciation from Fast ‘N’ Healthy to this.
10.
Unless you must change Other Non Current Assets
to balance, assume $35,000,000 flat for all out-years.
11.
Assume $2M flat for Accounts Payable for all
out-years.
12.
Use the prior 5 years average Accrued Expenses,
Notes Payable, and Other Non Current Liabilities, and keep them flat for all
out-years.
13. Use $300,000 for the Current
Portion of Long Term Debt, unless there is no long term debt
14. Long Term Debt – use this to
plug a balancing amount. NOTE you might
need to handle periods of LT Debt or Other Non Current Assets to balance. Figure out a way to capture that.
15. Other Non Current Liabilites ???
16.
Additional Paid-in-Capital is not expected to
change at this point.
17.
For Retained Earnings: determine the dividends paid in prior
periods. Urika would like to grow
dividends by 4% annually going forward.
18.
Use Long Term Debt or Other Non Current Assets
as appropriate as a plug to balance the Balance Sheet
Don’t forget to add in the effects of the Fast ‘N’ Healthy
project.
Make sure your model and financial statements are
professional in appearance and easy to navigate. Remember, a Senior Vice President will want
to see and use your work when you’re finished!