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Complete a financial evaluation – unicorp essays

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09Feb 2022 by

Option B: Outsource the online presence project overseas
Aftab Pty Ltd is investigating an opportunity to outsource the online presence project to a developing country. Through the outsourcing program, it is expected that the total cash fixed cost will drop by $200,000. The cost reduction will be achieved through access to cheap call centre facilities. Aftab’s current cost structure per annum (pre-outsourcing) is given in the table below:

Number of units sold per annum
15,000

Sales price per unit
$80

Variable cost per unit
$38

Total cash fixed cost per annum
$450,000

Total depreciation per annum
$100,000

You have been asked to assess the above plans and present your recommendations.
Written report
Write a report for the management team that addresses points 1 to 4 below:

Complete a financial evaluation of Option A using both NPV and simple Payback Period (not the discounted payback) capital budgeting techniques. Discuss which one is better and why. Use the payback cut-off period of 2 years for the evaluation, and use 12% as the discount rate to calculate the NPV. In assessing Option A, your report should also consider a sensitivity analysis on the NPV for the discount rate changing from 12% to 17%. Investing in a new business or new mode of delivery can be classed as a ‘risky investment’. How can the risk-return principle be applied here and, from a financial modelling point of view, how can the risks of the project be analysed?
Complete a critical assessment of Option B using break-even analysis. Calculate and evaluate the current accounting and cash break-even points of the business. Your analysis of Option B should then include the revised break-even points (both cash and accounting break-even points) considering the outsourcing option. Based on market research, you anticipate sales with the new outsourcing option to remain the same at 15,000 units. Comment on the financial and non-financial implications of Option B.
A further idea briefly discussed by Aftab’s executive team (but not as an option) was to extend the payment terms for customers from 20 days to 30 days. What are the implications of increasing the payment terms of customers to the cash cycle? Discuss possible scenarios where providing an extended payment term could benefit Aftab Pty Ltd.
Based on your analysis in points 1 and 2, recommend either Option A or Option B, or both, to the Aftab management team. Your recommendation should also include a detailed limitations section covering the challenges of using NPV, Payback Period and break-even points in the decision making.

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