Profitability of Fangio Brothers Smash Repairs - Case Study Example

?Case Study Fangio Brothers Smash Repairs’ Business Project Analysis Executive Summary Liu Yang, Jiwen Wang, William Huynh, Misa Huynh Fangio Brothers Smash Repairs (FBSR), which was set up in 1950’s is profitable and has fixed source of business flowing annually. Off late the company has been witnessing some turbulence times mainly due to the increasing dominance and control exerted by the major insurance companies as a result it’s affecting their profitability and cash management. The company has been incurring some non-operating expenses which are resulting in zero value addition to the business. These expenses are related to the land bought to expand business in future. The dilemma with the management of the company is what should be done with this land. They have two options; first option is that they can sell off this land for an impressive amount of $235,000 and also save the increasing annual maintenance expenses @3% which is $16,000 at the moment. The second option with the management is to use this land in expanding the existing business by setting up a new spray booth and workshop. This report provides an analysis and evaluation of these two options in hand for FBSR. We have used the capital budgeting tools such as Net present value (NPV), operating cash flow and sensitivity analysis in order to determine the feasibility of the options available at hand. The relevant calculations, with respect to each of the analysis technique used, can be found in the appendices. Our analysis is all depending on John’s assumptions which means our belief is the probability of assumption would range from NPV various. Within this analysis of the insurance project of the business, operation cash flow and profitability is the decide the feasibility of business. it’s the company’s choice of whether or not to take the insurance project in the business. Meanwhile, 10% increase or decrease in revenue and wages & maintenance fee of is under concern. by undertaking the insurance project, the smash repairs company has getting involved in a new business area where the business must buy equipment and building and car-park. the expansion of the business will have building and car-park cost of -$341,250 and equipment cost of -$350,000. This made up the initial investment to be -$964,750 include inventory, land value, old tools, training of spray machine, tax offset from training and maintenance costs. the company will operate at least 10 years and will get $9,912,462 and $7,571,847 as revalue, respectively, in insurance included case or excluded case. the NPV for this business is positive in the business which are insurance contained or negative for the ‘excluded’ business. 1. whether the business should included insurance business and its NPV is positive or not. 2. what is the affection of revalue changes and the affection of wages and maintenance cost? 3. what is the upper bound and lower bound of both of the sensitivity analysis? 4. what is the upper bound and lower bound of the business? to solve these questions, we decided to apply to capital budgeting by calculating operating cash flows (OCF), net present value (NPV) and sensitivity analysis for our decision-making program. based on our analysis, we found that: 1. company include insurance business: 1) The project would generate the total operating cash flow of $1,372,253 and the initial cash flow of -$964,750. the net present value (NPV) is positive amount $94,523 ($425,212 in best case, -$233,709 in worst case). 2) wages in old building and wages in promotion are $65,000 and $16,000, respectively. both of the wages will increase in 3% p.a. 3) In the base case which described in Appendix 1, the NPV is $94,523. if assume its sales increased by 10% (best case), the NPV would raise up to $302,768. oppositely, if the sales revenue decreased by 10%(worst case), the NPV would decline to -$113,722. besides that, if assume wages and maintenance fees (worst case) increased 10%, the NPV would decrease to -$25,464. on the contrary, if the fees (best case) decreased 10%, the NPV would increase to $216,967. the percentage changing of the NPV in best and worst situation because of change in sales revenue and the change in cost reflect that change in sales would be more beneficial for the project’s success to make effort to improve the sales revenue. 2. company exclude insurance business: 1) with the same amount of initial cash flow of -$964,750. the project would generate different operating cash flow of $1,179,442. the NPV is negative amount -$2,954 ( $237,590 in best case, -$313,495 in worst case). 2) general consumables has been changed together with sales revenue. it cost 10% of the sales revenue as a spending alone with all the other cost account. 3) in the base case which described in Appendix 8, the NPV is -$2,954. if assume its sales increased by 10% (base case), the NPV would increase to $137,324. on the contrary, if the sales revenue decreased by 10% (worst case), the NPV would would decline to -$213,230. besides that, if assume wages and maintenance fees (worst case) increased 10%, the NPV would decrease to -$138,219. Oppositely, if the fees decrease 10%, the NPV would increase to $62,313. 3. through our scenario analysis, investment in insurance business is not satisfactory as cash flow payback period is 5 years and cash payback period is 10 years. from sensitivity analysis, we found that NPV is a key effect to decide tis profitability. Only 5% drop can lead to negative NPV (I add 2 bad case for analysis) while increase 5% wages and maintenance fee NPV still was positive. calculation of the operation cash flow and NPV suggest that 10% changes in revenue is more beneficial than wages and maintenance fee of the business. incremental service from insurance should be included ,otherwise, our base case is very poor. Even though the variable cost could be decreased the fixed cost still could not be covered. By comparing NPV from both of the analysis, changes in sales would make the company more profitable than changes of cost. therefore, it will be more beneficial for the project’s success to enforce new insurance business to the company. in conclusion, insurance service business should be continuously increase to increase the total revenue. Even though wages and maintenance cost are not key affection, keeping the eyes on it will benefit the company. Recommendations: Make the spray booth functional in a way that it can be used for both parts and full body parts Reduce dependency on the insurance companies for work. The company has been doing good business with historical cars business. Therefore if first recommendation can be adopted, this could bring in more business for historical car segment without adding any additional spray booth. Insurance related work contributes directly 45% to the total cost and 20% is contributed by the historical car segment. Remaining35% is a cost shared by both these segments. Therefore as per the estimates insurance work contributes a total of 62.5%( 45+ (35/2)) to the total cost but only contributes 23% approximately to the total revenue. This means the insurance business has more fixed cost attached, hence should if the company can increase the revenues from insurance work segment, the total revenues would increase but subsequently at a relatively reduced total cost hence increasing the profitability of the company. The company should be able to utilize the available capacity in such a manner so that the fixed asset cost is spread out to maximum possible levels which would increase the ability of the company to generate more profits. For instance, the project would bring in an increase in inventory of common spare parts. Instead the company should first analyze if they could manage with the existing stock of inventory at 100% capacity utilization. Appendix 1: insurance included business base case Appendix 1-1: insurance included business best case Appendix 1-2: insurance included business worst case Appendix 1-3: sensitivity analysis 1: best case Appendix 1-4: sensitivity analysis 1: worst case Appendix 1-5: sensitivity analysis 2: best case Appendix 1-6: sensitivity analysis 2: worst case Appendix 2: insurance excluded business base case Appendix 2-1: insurance excluded business best case Appendix 2-2: insurance excluded business worst case Appendix 2-3: sensitivity analysis 1: best case Appendix 2-4: sensitivity analysis 1: worst case Appendix 2-5: sensitivity analysis 2: best case Appendix 2-6: sensitivity analysis 2: worst case Read More