Keeping the Original Name of MCS Mining Supplies - Essay Example

Task One. The business should keep the original of “MCS Mining Supplies”. It makes good business sense in that it suggests that the business isa continuing and ongoing business entity despite the change of ownership. This is important because MCS has a 40% share in the domestic market, and a reputaion cultivated and nurtured over the years. Thus, by virtue of this dominance in the industry it proves that it is a well known brand to its customers, suppliers and competitors and by implication also known for its good services and reliability. Therefore, retaining “MCS” sends out the message that the new owners intend to continue and build on the already existing good services and reliability that 40% of its domestic market have come to appreciate over the years. Furthermore, changing the name has its own costs, for example, the stationery (invoices, receipts, letterheads), and signage have to be altered to reflect the new name change. The other embedded costs are that the new company now has to build a new brand for itself, granted its not from scratch, however both these costs are higher than the benefits of keeping the original name. On the other hand, of course, changing the name will alert customers and suppliers that there has been a change of guard and including you name (Pinessi) well known in the mining industry will have its own benefits. However, these benefits might still be realised if the business keeps it original name and the industry alerted to the fact that you are now a partner in the business, via press release or other public relations technique. Task 2 Mission Statement MCS Mining Supplies is a leader in the mining supplies industry. We manufacture drill products that suit a range of customers, from those requiring high volume to those needing unique, custom drill aparatus. MCS is comprised of a highly skilled staff complement that designs customised drill bits to order, ahead of deadline. We currently have manufacturing plants located at two sites in Western Australia, Perth and Kalgoorlie, and in Mount Macarthur in Queensland. We supply 40% of the domestic market and have extended into the rapidly expanding East Asian market, taking with us a brand recognized for quality, capacity and reliability. We ain to expand our construction industry market share in both the domestic and East Asian markets. Our Korean arm is particularly well-positioned to serve the ever expanding China construction industry market, which in the largest domestic market in the world. We are also diversifying our product line and developing a related product with application in oil fields. At MCS we pride ourselves on maintaining business integrity while quickly adapting to new technologies and opportunities. Objectives MCS Mining Supplies intends to maintain its 40% market share of the domestic industry and if possible expand beyond the current market share. Realise its growth forecast of between 7.5 and 12% in the current financial year. Build on forecasted annualised growth over the next three years that expected to reach15%. Expand sales volumes in the South Korean market. This market has potential for growth because the domestic market may have reach saturation point. Expand into the high growth rate China economy using existing networks, contacts and proximity of the Korean experience. Balance short-term market fluctuations by expanding into new African markets. Especially in Southern African region. Swot Analysis. Strengths MCS holds 40% of the domestic market. Its a dominant player in the field thus more likely to control prices, and beat off competition. The business has an annualised growth rate of 8% over the years thus with the right strategy continue to grow. its expected that this financial year growth is forecast to be between 7.5 and 12% too. Growth expected to reach 15% in the next three years. Has branched into the South Korean and managed to achieve the high volume of sales MCS. Has a highly skilled workforce of 50% thus further employee training are minimised. Weaknesses Rate of returns in the mining industry are prone to fluctuations thus medium to long-term financial planning maybe problematic. The low margins in the Korean market are a cause for concern especially if sales volumes drop. Opportunities MCS is already in the South Korean market so its possible to use those contacts to expand into the mainland China market the largest domestic market in the world with a huge mining industry Gold and commodity prices are at record highs, thus new investments and growth opportunities in the industries more likely. Utilize market share and commonwealth ties to expand into stable, growing mining sector in South Africa with a view toward long-term prospects on the African continent Threats The global recession that began in 2008 seems likely to continue in the short to medium term. Diversifying into the oil industry might have long-term grave consequences because of the search for greener energies globally. The volatility of currency markets make long term planning difficult. Task 3 Option one The first table shows the PV values for the sales cash inflow. The second table on the right shows the cash outflows for the loan repayments. The final table below shows the cash outflows to cover the cost over the 10 years. 52000 1.12 1 1.12 46428.57 50000 1 1 1 50000 52000 1.12 2 1.2544 41454.08 62500.00 1.09 1 1.09 57339.45 52000 1.12 3 1.404928 37012.57 62500.00 1.09 2.00 1.1881 52605 52000 1.12 4 1.573519 33046.94 62500.00 1.09 3 1.295029 48261.47 52000 1.12 5 1.762342 29506.2 62500.00 1.09 4 1.411582 44276.58 52000 1.12 6 1.973823 26344.82 252482.5 52000 1.12 7 2.210681 23522.16 52000 1.12 8 2.475963 21001.93 52000 1.12 9 2.773079 18751.72 52000 1.12 10 3.105848 16742.61 293811.6 26000 1.05 1 1.05 24761.9 26000 1.05 2 1.1025 23582.77 26000 1.05 3 1.157625 22459.78 26000 1.05 4 1.215506 21390.26 26000 1.05 5 1.276282 20371.68 26000 1.05 6 1.340096 19401.6 26000 1.05 7 1.4071 18477.71 26000 1.05 8 1.477455 17597.82 26000 1.05 9 1.551328 16759.83 26000 1.05 10 1.628895 15961.74 200765.1 NPV for option 1 is Cash inflow from 293811.6 - 200765.1 - 252482.5 = -$159,436 Option 2 The first table shows the PV values for the sales cash inflow. The second table on the right shows the cash outflows for the loan repayments. The final table below shows the cash outflows to cover the cost over the 10 years Again NPV = 727,183- 634,110.53 -361,377.19 = - $538,304.72 Both options give a negative NPV values. Although Option 1 is greater than option by double the amount, its better that neither are chosen. Task 4 The cost to manufacture 1 generic drill bit $3,500 Additional Material Costs: 500 Additional Labour Costs: (120 man hours @ $30/hour) $3,600 Remember that Generic drill bills are normally sold for $6,500 and four are normally manufactured each week. The minimum selling price is as follows For the additional labourer 25% of $3,600 = $900 Therefore labour cost to manufacture generic drill bit $2,700 Thus the total variable cost to modify generic drill bit is as follows: Cost of generic drill bit + Additional Material Costs + Additional Labourer + $3500 + $800 + $900 = $5200 (Total variable costs) Contribution margin of the generic drill = selling price(6500) – variable cost (3500) = $3,000 To maintain the contribution margin then the minimum selling price of modified drill will 5200 + 3000 = $8,200 Task 5 Volume of units sold: 12,000 @ $450 per unit Therefore total sales per year is 12000*450 = $5 400 000 Total cost per unit 5kg steel per unit @40/kg = $200 Carbide per unit $50 = $50 Insulation per product = $30 Total =$280 Direct Labour 4 hours @ $25 = $100 Machine time = $5 Advertising = $10 Travel expenses = $1.50 Total = $ 116.50 Add: total cost price per unit = $396.50 Total cost per year is 12000*396.50 = $4 758 000 NPV of Proposal 1 If sales are increased by 60% by discounting selling price by 10% Then the new selling price is $405 Then total sales per year is 7200 + 12000 = 19200 Then total sales is 19 200* 405 = $7 776 000 Less total costs 19 200*$396.50 = $7,612,800 Surplus is $163,200 Proposal 2 If insulation costs are reduced by 40% = $18 @unit from $30 Therefore total unit cost is 396.50 – 12 = $384.50 However sales decrease by 6% of 12000 (720) = 11 280 Total sales then is 11280* 450 = $5 076 000 Less total costs of $384.50*11280 = $4 337 160 The surplus is $738 840 Proposal 3 If share price is reduced by 10% for two months, volume will increase by 50%. Remember that sales are evenly distributed throughout the year with means that in two months sales are 1/6 of 12000 = 2 000 Therefore if selling price is $405 sales are 3000. After two months the discounted price is increased by 5% then the new price is $425.25. Sells are supposed to increase by 20% of the current 10 month period (10,000) which is a total of 12,000. Therefore total sales for the year is $405*3000 + 425,25*12,000 = $6,318,000 Less the original costs of all the products sold (15,000*396.50) = $5,947,500 The surplus is $370,500 Therefore Proposal 2 should be chosen. It has the highest option. Task Six South Africa is a fantastic option for long-term investment in the mining sector. While the South African rand is currently strong, at R6.78 to 1 Australian dollar, economists predict and South African policy makers advocate a reduction in currency strength in the next period. In addition, the rand operates as a regional currency and can help balance out the effects of fluctuating currency markets on MCS’s profit margins if and when the entity expands throughout the region. Currently the Rand is gain on the dollar but economist believe the rand is overvalued for the short-term and will stabilise in the medium to long-term to a value of around 10 rands to the dollar (Reuters. October 14, 2010) South Africa is among Africa’s largest economies with an extremely stable, democratic political environment which has taken root and become stronger since the end of Apartheid in 1994. The nation is a historical centre of mining, while at the same time offering fantastic continuing opportunities for growth. As president Jacob Zuma recently put it, South Africa “continues to host significant known reserves of mineral commodities, with almost 60 minerals being actively mined…A large number of these known reserves were discovered using conventional exploration methodologies and technologies." ( BuaNews, September 29, 2010).While further technological development and expanded exploration may reveal greater mineral wealth, South Africas mineral assets (excluding as coal, uranium and thorium which are present in abundant quantities) are currently valued at US$2.5-trillion. Expert geologists believe these minerals can be profitably mined through the next century. Further the mining industry has expanded by 10.5% this year, more than the 0.9% quarterly growth for the enter economy in the last business quarter. (Downing, R. & Anderson, 2010). Further, South Africa is an excellent base for expanded mining investment in Africa. Considered by many to be the “door to Africa,” investment in South Africa paves the way for easy expansion into neighbouring and nearby mineral-rich nations including Zimbabwe, Malawi, and Angola. Zimbabwe may present an excellent site for future investment (according to a recent forum sponsored by the Economist), because it it is currently reputed to have the largest diamond fields fields discovered in over a century. Its possible to harvest future benefits in this market as the political situation in Zimbabwe stabilises from a secure South African base.(Economist, September, 2010) The historical links between South Africa and Australia means that they are few cultural and religious minefields the business has to negotiate. Both countries are members of the Commonwealth, English is the official language, both play rugby and cricket and there is a huge South African expatriate community in Australia. BHP Billiton is a major play player in the mining industry because it has realised the easiness of running a business in the country. South Africa’s political stability and because its a constitutional democracy this will provide protection for our investments. The independence of the judiciary is one of the cornerstones of the constitution that ensures the supremacy of the Constitutional Court decision even over the parliament. Individuals and corporate rights form an integral part of the legal body political of South Africa. Its also a member of the WTO that allows for companies to sue governments in internationally sanctioned arbitration tribunals. South Africa has world renowned universities including the University of Cape Town, Witwatersrand University and many others that ensure that the business has a steady pool of qualified graduates to select for highly skilled jobs. Its higher education institutions have been producing qualified individuals for the mining industry for over a century. The South African mining is also at the cutting edge of new technology especially drill bit tech in the mining sector (Wanacott, 2010). This is set to improve growth and development in the sector and MCS will be able to position itself to benefit from this cutting edge technology in South Africa. The As mentioned earlier language is not a barrier because English is the language of business, and university education, in fact, its the de facto official language of the country. Despite the years of apartheid it has a high literacy rate of over 88% (BBC, 2010). South Africa recent successful hosting of the soccer World Cup shows that it has recently invested in infrastructural improvements. Reports from the country say that private sector fixed investments has grown by 72% in real terms and business confidence which has increased by 16% since South Africa was named the host nation for the 2010 World Cup in 2004. The report further says that this forced the country to invest close to R40 billion in infrastructure project including stadiums and training venues, but also in roads, rail, public transport, safety and security. SA Good times, 2010)(Marais, 2010). Works Cited 1. Staff. “Invest in South African mining: Zuma.” BuaNews, September 29, 2010. Accessed October 10, 2010. http://www.southafrica.info/business/investing/opportunities/mining-290910.htm. 2. Staff. “South Africa Country Profile.” BBC News, August 10, 2010. Access October 10 2010. http://news.bbc.co.uk/2/hi/africa/country_profiles/1071886.stm 3. Staff.”South African Mines Charger Welcomed.” BBC News, October 10, 2010. Accessed October 10, 2010. http://news.bbc.co.uk/2/hi/business/2316123.stm 4. Staff.”Trade Profiles: South Africa.” WTO, March 2010. Access October 11, 2010. http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=ZA 5. Staff.” South Africa’s Gordham Echo’s World Currency War Warning.” Reuters. October 14, 2010, Accessed October 14, 2010. http://af.reuters.com/article/southAfricaNews/idAFLDE69D0ST20101014?pageNumber=2&virtualBrandChannel=0 6. Marais, J. :Its Getting Better.” The Times. September 29, 2010. Accessed Octboer 12 2010. http://www.timeslive.co.za/business/article664959.ece/Its-getting-better---Tsvangirai 7. Staff. “Country Briefing: South Africa.” The Economist. January 16, 2010. Accessed October 12 2010. http://www.economist.com/countries/SouthAfrica/ 8. Staff “Country Briefing: Angola.” The Economist. August 30, 2008. Accessed October 12 2010. http://www.timeslive.co.za/business/article664959.ece/Its-getting-better---Tsvangirai 9. Downing, R. & Anderson. “Mining Production Up 10.4% in August.” Business Day, October 14. 2010. Accessed October 14, 2010. http://www.businessday.co.za/articles/Content.aspx?id=123829 10. Wonacott, P. “Africa Dispatch: A New Drill for South Africa’s Miners” The Wall Street Journal, October 14 2010. Accessed October 14 2010. http://online.wsj.com/article/SB10001424052748704361504575551300273644616.html?mod=googlenews_wsj Task 7 Only half the $1,000,000 has to be borrowed from the banks. That means only $500,000 will be borrowed from the banks. Option 1 $500 000 at 7% compounded annually is EOYear 1interest is calculated as follows 500000*7/100 FromEOY2 interest in then compounded. Option 1: Interest Calculation per Year Year end Principal at year end Interest at year end at the time. EOY1 500000 35000 EOY2 535000 37450 EOY3 572450 40071.5 EOY4 612521.5 42876.51 EOY5 655398 45877.86 Total Interest 201275.9 40255.17 For option 1, the total interest payable is $201,275.90 Add interest to the principal 500,000 = $701,275.90 $701,275.90 divided by 5 years = $ 140,255.18 amount to be paid every year. Option 2 Interest is compounded monthly at 7.92 p.a. Thus for EOMonth 1 interest is as follows 500000*(7.92/100)*1/12 = $3300 Amount at month end Interest per month 1-12 Year1 500000 3300 537521.9 3547.645 581673.5 3839.045 629451.7 4154.381 681154.3 4495.618 503300 3321.78 541069.5 3571.059 585512.5 3864.383 633606 4181.8 685649.9 4525.289 506621.8 3343.704 544640.6 3594.628 589376.9 3889.888 637787.8 4209.4 690175.2 4555.156 509965.5 3365.772 548235.2 3618.353 593266.8 3915.561 641997.2 4237.182 694730.4 4585.22 513331.3 3387.986 551853.6 3642.234 597182.4 3941.404 646234.4 4265.147 699315.6 4615.483 516719.2 3410.347 555495.8 3666.272 601123.8 3967.417 650499.6 4293.297 703931.1 4645.945 520129.6 3432.855 559162.1 3690.47 605091.2 3993.602 654792.9 4321.633 708577 4676.608 523562.4 3455.512 562852.6 3714.827 609084.8 4019.96 659114.5 4350.156 713253.6 4707.474 527018 3478.319 566567.4 3739.345 613104.8 4046.491 663464.7 4378.867 717961.1 4738.543 530496.3 3501.275 570306.7 3764.024 617151.2 4073.198 667843.5 4407.767 722699.6 4769.818 533997.6 3524.384 574070.8 3788.867 621224.4 4100.081 672251.3 4436.859 727469.5 4801.298 537521.9 3547.645 577859.6 3813.874 625324.5 4127.142 676688.2 4466.142 732270.8 4832.987 Total interest per year 41069.58 44 152.6 47778.17 51702.63 55949.44 199581.8 The total interest to paid for the whole is $240,651.40 Monthly payments are to by (740,651.40)/60 = $12,344.19 The best option then is Option One because first less interest is charge in whole period and the payments are less compared per annum or monthly. 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