Sustainable Investment Solutions Inc - Tanka Limited Analysis - Assignment Example

Insert your name here Subject: Finance Title: Sustainable investment Date: 7th May 2009 Sustainable investment solutions Inc.: Tanka limited analysis and recommendations Introduction Sustainable investment solutions Inc, is a company that is eco-friendly solutions oriented. It is mainly concerned with provision of economic solutions that are aimed at greater production while playing part in environmental upgrading. Along with this process comes, business profitability analysis and strategy suggestion. In this situation, Tanka Ltd will get their recommendations and business analysis and this will be based on their financials. Executive summary A close look at Tanka limited shows that it is still at the exponential growth phase. This is because after operating for the last five years, it has established a trend of successive and incremental profits. This is great news to potential investors since the company has growth potential. With only an operating capital of $250, 000, the company is able to raise a gross profit of $400,000 and a net of $94,500. This shows that there is a return on equity of 7.8 % at a time when the capital assets only account for $1050000 and machinery being $450000. This is an indicator that with more machinery and with the high affinity of the product from the customers, if there were more machines, the production could be higher and the marketing boundaries would expand to all areas in Australia and abroad. This would in turn result into more profits and therefore a brief analysis of the company financials already shows that Tanka limited is a company with viability on investment. The fact that it is not listed in the stock market makes it immune from the world economic changes and this is an advantage since it is possible to nurture the profitability of the company slowly until it reaches a multinational level (Lenos 95). Purpose of the report The purpose of this report is to see to it that Tanka limited has hit its potential productive capacity with a three year period. The analysis is aimed at coming up with a capital budget financing technique that will enable the company to expand in its capital structure and increase productivity while it ensures that it does not affect its profitability negatively. It is also aimed at offering management an expansion system which they will use to increase revenue and to present to all potential investors as an indicator that the company is inclined to making profits (Sachs & Jeffery 08). The evaluation is also meant to give potential investors a go ahead into investing in the company. The report is also aimed at enlightening the current share holders on their returns on investment. This report is aimed at offering Tanka Ltd a way forward. This is in terms of sustainable investment. The sustainability in this case will be recycling of tins that will be used to in packing coffee in the industry. Tins can not decompose and when they are littered around, they pollute the environment with their chemical content which inhibits greening of the environs. Tins are breeding areas for mosquitoes that cause malaria so when they are left around, they are health hazards and they may lead to spread of malaria. When tins are left around, they make the environment look untidy since they litter around the area. When Tanka. Ltd decides to collect tins and recycle them, this will be a very environmental friendly measure since there will be no littering of tins in the area. They will also be preventing the spread of malaria and therefore they will carry out a social responsibility of cleaning the environs. They will benefit since the community will be aware that they are cleaning the environment and they will buy their products which will be promoting their products. They will also benefit from the tins since they will reduce the cost of buying tins from manufacturers when they recycle. This will reduce the operational costs (Speth & Gustave 08). KPI s’ (Key Performance Indicators’) A consideration of the Key Performance Indicators of Tanka Limited shows the following results: The company is already making a profit so there are indicators that it is capable of financing a loan. There are investors who are planning to join the company so there are forecasts that there will be an increase in the cash of the company since the investors will offer a certain amount of money when they buy shares in the company. Depending on the number of investors who are planning to join the company, the more there are the better the chances of financing a capital investment. The company is embarking on a recycling process. This will be a permanent thing and therefore the company will cut the operational costs that were being channeled into buying of packing tins since they are now making tins for themselves. At later stages of the recycling plan, the company could recycle many tins and they would even start selling them to other companies which will be a profit making venture. The company is not listed in the stock exchange so its shares are not subject to the pricing that is done in the stock market. The management is therefore the people who can decide the amount that investors will offer when they want to buy company shares. Another advantage of not being listed in the stock exchange is that the company will not be affected by external economic constraints and therefore it will be possible to monitor a profit making, capital investment and expansion plan. Since the company is a limited company, decision making will be quick and the financing will not require long processes therefore a plan implementation will not take an unduly long duration. The company is already planning on sustainability investment and capital investment financing which shows that company management has a bright vision for the company and that the company is inclined at permanent expansion, market capitalization and implementation of eco-friendly measures. The company is already past the stage of introducing their coffee to the market and since the customers are already using the product, a little marketing and advertising will promote the brand beyond the company reach and what will eventually happen is that the company will have more demand than supply. In such a case, the company could increase their productive capacity again and then when the company is sure that the customers are now accustomed to their coffee, they could now increase the price gradually with margins that the customer will consider insignificant compared to the rate of satiety that will be derived from the coffee. A tax of $40500 on a sales revenue of $1500000 shows that tax only takes away 2.7% of the entire sales revenue which is not exorbitant and therefore there is no need to worry about tax being a hindrance into sustainable investments. Assumptions For mathematical reasons it is important to make a few reasonable assumptions which are as follows: The product that Tanka Limited produces is coffee. The price per unit of coffee is $60. These units are packed in cartons and each carton contains a dozen of coffee tins. Therefore a single tin of coffee costs $5. Assuming that the company works for 25 days in a month, it is evident that the current actual sales per day are $60000. This amounts to a sale of 1000 units per day. Assuming that the machine runs during the day only and that it has a constant production capacity per day, then it is capable of producing the amounts of the units sold daily, currently and a little extra that can manage to service supply for a day. This is because we already have inventory of $60000. Assuming all market factors remain rational and therefore there is a gradual increase in the demand for the coffee that Tanka limited is producing, the demand will be assumed to be growing at 20% per annum. We will assume that a loan is payable in equal monthly installments. The interest rate is 10% on principal amount. The repayment period of the loan is three years just like the sustainable investment implementation program. We will assume that there will be an increase of the operating costs by half the current amount. Caution The amounts that the management will ask from the investors will have to be reasonable to avoid giving the company a bad impression that they are very money minded or they are after investor exploitation. An increase in price when embarking on a capital investment and expansion plan is not a wise decision even though the company is in dire need of cash. This is because the customers might turn their backs to the brand and this will reduce the revenue even more. It is therefore advisable that the company should increase the price of coffee when they have finished expanding and paying debts and loans. At this time, the increase in price will convert into pure profits and the company can deal will a customer reaction easier than when it is working on an expansion plan. The terms of the loan should be clearly discussed with the financier and there should be space for amendment of terms in a way that the borrower is favored (Robin, Cary & Nick 08). Since the company is a limited company, the management should critically scrutinize the potential investors and learn their intentions. They should monitor the plans of the investors and they should know what percentage of power and voting rights that they arte offering the investors. This will prevent a case where they hand over a company by selling off large chunks of the company shares and realizing later that the new investors have taken over the management of the company. Detailed analysis The above analysis has given a model which the company can use to steer its way to sustainable investment. It is an indicator that the cash flow is controllable and therefore the risk margin for a potential investor is extremely low or rather insignificant compared to the profitability margin (Brealey & Myers 08). Looking at the financial tables for an actual display of the current and projected financials, the figures will look as shown below. The current cash flow system looks as shown below. Source of funds $ Sales 1500000 Debentures 300000 Available Cash 1800000 Use of Funds Operating expenses 250000 Interests 15000 Tax 40500 Total Cash out (305000) Net Cash Flow 1495000 The Operating cash flow projections will resemble the one below Years Year1 Year2 Year 3 Source of funds $ $ $ Beginning cash 2295000 5865000 Sales 2500000 4000000 5000000 Loan 1500000 0 0 Available Cash 4000000 6295000 10865000 Use of Funds Operating expenses 375000 375000 375000 Interests 15000 15000 15000 Tax 40000 40000 40000 Capital Expense 1275000 0 0 Total Cash out (1705000) (430000) (430000) Net Cash Flow 2295000 5865000 10435000 Recommendations I would recommend that the company sets up a department that deals with greening of the environment. Starting a project like tin recycling will be cost effective and the tins would be used in packing coffee in the company. This department will be collecting tins around Tanka Ltd environs and then the tins can be recycled. Running of the department should not bring incremental costs of more than $10000. The tin recycling department should be operated by one manager who is under a considerable remuneration and temporarily hired workers who earn a wage. In such a plan, it is possible to control the costs of the recycling department. Recycling should be done once in a while when there are many tins for recycling and the tins should be stored for use when they are needed. Taking a net present value approach will require the company to strain in production to improve on sales since the sales and production are dependent on each other and therefore it is impossible to increase sales without an increase in demand (Miller & John 07). A close look at the current profitability rate of the company, the net profit is $94500. The cost of machinery is $ 450000. Making a capital expenditure like adding an extra machine would require space for expansion and therefore Tanka Limited would be forced to get an extra building at $600000. With the current net profit being $94500, Tanka limited will require 11 years making the same profit for it to raise money for a capital expenditure. It is therefore advisable that Tanka Limited takes a loan of $1500000 (Graafmans 97). The repayment of the loan will require the company to pay equal monthly installments of less that $50000. The exact figure will be $48000. This is an amount that the company can raise even at the current profitability rate. It is therefore very profitable when the company gets two machines since the production will be doubled and the machines will not be overworked. The machines will therefore not be overworked and therefore they will not be depreciated. The efficiency rate of the company will be improved (Evans & Hatry 84). After financing the purchase of capital assets that will be machinery and building at the current rate, there will be money left. The amount left will be $450000 that the company could use part of it in advertising to increase sales while part of it will be invested in corporate social responsibility like planting of grass and trees in the environs around TankaLtd. This loan repayment module is one of two ways in which the company can plan a capital expansion. The other way would take a longer time. It will be externally dependent and therefore it is not prudent. It will be based on the contribution that the investors are ready to offer. If the investors are many and they are seriously interested in the company, the management can come up with a proposal and show the investors the forecast profits and the cash flows. This will in turn entice the investors to offer money that will be used in the capital investment. The management does not necessarily have to show the potential investors that they are in need of their money. Instead, they could plan a proposal that will just show the profit forecasts and then set a deadline to the investors who, if interested should buy their company shares by a certain date. The amount that the investors are supposed to pay should be reasonably set in relation to the money that the company needs to expand. It should however not be exorbitant since the potentials investors will consider things like cost distribution and allocation while they are analyzing the financial statement of the company before they decide whether they should invest or not (Philip 09). Investment proposal The investment that Tanka Ltd should implement is buying of new machinery. When the new machinery comes, it will obviously need a building in which it will be housed. The estimated amount of the machinery and the building will be financed by a loan. In any case, if there are investors who are planning to join the company by buying a percentage of shares from it, it will be a better idea since they will have to part with a considerable amount of cash. This will show their seriousness in the investment. The amount that a potential investor offers to the company will be determined by the management. They could use whichever criteria but I would advice them that they should compute their capital investment costs and the come up with a model like the one shown below. $ Cost of capital investment 1500000 Available cash from cash flow 450000 Loan 500000 Amount left 550000 Compared to the capital that the company already has of around $1200000, adding an investment of $550000 will ease the finances of the company since they will have operating capital in form of cash. The investors could contribute the sum of $550000 each. Depending on the number of investors that there is, the more the contribution, the better the financial position of the business since there will be more cash. This will in turn upgrade the financial status of the company. The projected cash flow shows that the plan that will be implemented will be free of any undue costs and it will be producing larger qualities of the product. This will in turn require the company to widen the boundaries of distribution of their products. Since the people already like the product after it has been introduced, the product has therefore passed the acid test of being liked by the public and therefore what remains is advertising and the public will try out the product. There is money that is allocated for advertising and therefore the company will not be squeezed trying to finance advertising (Paula 08). Conclusion Sustainable investment solutions Inc. has offered Tanka Ltd alternative models that they could use to expand their production, profit making and customer base. At the same time it has offered the company a solution that will contribute socially to the community while at the same time it will profit Tanka Ltd. This is therefore a win-win situation which is very rare in most businesses. Applying the idea of expanding and sustainability investment at the same time will be like killing two birds with one stone since the company will give a shot at dynamicity with one step. The best thing is that there are people who are already planning on investing in the company and therefore there are alternative sources of capital for expansion and sustainability investment. The best thing is that the implementation will take only three years. After this period the company will have leaped years ahead. This expansion plan is well spelt out and that enables the management to implement it with a guide that simplifies the process. A cash flow increment of 1 million to 10 million shows that there is a major increase in revenue and at the same time that there is a great cost control measure in place. This shows that the plan that is about to be effected is viable and there are chances that if the plan is extended into a second phase after the first phase is completed, there will be a much greater improvement than in the first phase. Works Cited 1. Bales, Paula. Too Cute Cans Book . Grace Publications, 2008. 2. Bromiley, Philip. Corporate Capital Investment : A Behavioral Approach . Paperback (Cambridge Univ Pr;, Jan 9 2009. 3. Graafmans, J. Gerontechnology. Ios Pr Inc , 1997. 4. James H. Evans, Harry P. Hatry. Guide to Setting Priorities for Capital Investment . Paperback, 1984. 5. Miller, John G. Flipping the Switch... Paperback, 2007. 6. Richard A. Brealey, Stewart C. Myers. Capital Investment and Valuation. Value Based Management, 2008. 7. Robins, Cary Krosinsky and Nick. The Art of Long-Term Performance. Earthscan, October 2008. 8. Sachs, Jeffrey D. Common Wealth. Paperback, 2008. 9. Speth, James Gustave. The Bridge at the Edge of the World: Capitalism, the Environment, and Crossing from Crisis to Sustainability. Paperback, 2008. 10. Trigeorgis, Lenos. Real Options in Capital Investment: Models, Strategies, and Applications . Praeger Publishers, 1995. Read More