Retaining the MCS Mining Supplies' Name - Essay Example

Task One. The business should retain the “MCS Mining Supplies”. This choice is the best because it emphasizes the company’s longevity in the market. This is critical because MCS has a 40% share in the market for drill bits and parts, and therefore a lot of brand recognition among suppliers and competitors. MCS is already known for its service and reliability. For this reason, keeping the original name sends out the message that the new owners intend to build on the past and maintain quality in the fiture In addition, changing the name is costly, as it would require spending funds on new letterheads, signs and marketing. However, a name change could potentially alert customers and suppliers to new ownership and increased vitality and momentum at the company. In particular, the well-known name (Pinessi) has its own marketing benefits. But are these benefits really worth change the name? This seems unlikely thus great benefits will still be realised by retaining MCS Mining Supplies name and launching a new but limited marketing campaign alerting the industry to the new joint venture between well-known players in domestic mining. Task 2 Mission Statement MCS Mining Supplies leads the mining supplies industry in Australia. We produce drill products that suit a wide range of customers, from high volume, low cost orders to unique, custom drill apparatus. MCS is staffed by highly skilled designers, machinists and technicians who produce drill custom pieces order, ahead of deadline and bulk orders with consistency and reliability. We maintain manufacturing plants at two sites in Western Australia, Perth and Kalgoorlie, and in Mount Macarthur in Queensland. MCS supplies 40% of the domestic market while we are expanding into the rapidly developing East Asian market, building our brand which is recognized for quality, capacity and reliability. We aim to grow our construction industry market share both at home and abroad. Both our Korean chapter and new projects in China serve the Chinese market, which is the largest in the world. We are also expanding our product line and developing related products specifically for the oil industry. At MCS we pride ourselves on maintaining our core vision of service and stability while quickly leveraging new technologies and opportunities. Objectives Maintain our 40% market share of the domestic industry expand to 50% in 5 years. Achieve between 7.5 and 12% growth in the current financial year. Build on predicted annualised growth over the next three years that expected to reach15%. Expand sales volumes in the South Korean market to counteract potential domestic market saturation. Expand into the high growth rate Chinese economy using lessons-learned from our Korean experience. Swot Analysis. Strengths MCS supplies 40% of the domestic market. Its a leader in the field and best able to achieve low cost and high quality. MCS has an annualised growth rate of 8% a sound basis for continued growth. This year growth is expected to be between 7.5 and 12%. Growth is expected to reach 15% in the next three years. Has branched into the East Asian market with high-volume sales Has a highly skilled workforce of 50% minimizing the need for further investment in employee training. Weaknesses Returns in the mining industry are fluctuation prone, as a result medium to long-term financial forecasting is unreliable. Low margins in the Korean market are a danger in the face of decreasing sales volumes. May be facing saturation of the domestic market Opportunities MCS has expanded into the South Korean market and can use those contacts to grow into the mainland China, a massive market for mining and construction with a high potential for growth Gold and commodity prices are at record highs, thus new investments and growth opportunities in the industries more likely. Long term outlook for new exploration and in minerals and oil will require new investment in these industries Threats The global economic crisis that began in 2008 is predictred to continue in the short to medium term. Expansion into the oil industry might face competition through search for renewable energy sources The volatility of currency markets threaten the profitability of overseas investments. Task 3 Option one The first table includes the present values (PV) for the sales cash inflow. The second table on the right includes the cash outflows for the loan repayments. The final table below includes the cash outflows for 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 includes the PV values for the sales cash inflow. The second table on the right includes the cash outflows for the loan repayments. The final table below includes the cash outflows to cover the cost for 10 years NPV = 727,183- 634,110.53 -361,377.19 = - $538,304.72 Both options result in negative NPV values. Option 1 is greater than option 2 neither should be 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 Generic drill bills are sold for $6,500 and four are produced per week. The minimum selling price is: added labour 25% of $3,600 = $900 Labour cost to manufacture generic drill bit $2,700 The total variable cost to modify generic drill bit is: Cost of drill bit + Additional Material Costs + Additional Labour + $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: 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 12000*396.50 = $4 758 000 NPV of Proposal 1 If sales are increased by 60% by discounting selling price by 10% New selling price is $405 Total sales per year is 7200 + 12000 = 19200 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 Insulation costs are reduced by 40% = $18 @unit from $30 Total unit cost is 396.50 – 12 = $384.50 Sales decrease by 6% of 12000 (720) = 11 280 Total sales is 11280* 450 = $5 076 000 Less total costs of $384.50*11280 = $4 337 160 The surplus is $738 840 Proposal 3 When the share price is reduced by 10% for two months, volume will increase by 50%. Sales are evenly distributed throughout the year with means that in two months sales are 1/6 of 12000 = 2 000 When the selling price is $405 sales are 3000. After two months the discounted price is increased by 5% then the new price is $425.25. Sales 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 Proposal 2 should be chosen as the most profitable proposal. Task 6 China’s phenomenal economic growth has been among the worlds’ biggest success stories since the reforms of Deng Xiou Ping in the 1980’s. Just a few years earlier, China was in the throes of Mao’s cultural revolution, which decimated entire industries, halted educational output, and impoverished its rural countryside. Today, in 2010, its economy is now the second largest economy in the world behind the US with a GDP of $4.33 trillion ,and on the verge of becoming the largest economy in a few decades (BBC 2010). China’s growth potential is enormous because it’s the largest domestic market in the world, yet its manufacturing outlook is still very much export orientated. Thus as the Chinese middle class and much of its rural poor increase their income and spending on consumer goods, the Chinese market potential will increase. Growth potential then lies in industries that supply these new and wealthier hundreds of millions of consumers with an abundance commodities that rivals their counterparts in the West. This increasing consumer market already requires massive investment in infrastructure and technology, from roads to energy and communication infrastructure (Business Wire 2010). Thus, continued growth the extractive industries in China, such as mining and oil is a given. Thus and a mining drill bit business such as MCS Mining Supplies is in a position to benefit as the China’s minding and construction companies expand their operations both at home and abroad to meet China’s domestic demand . Already many Chinese oil companies are scouring Africa, brokering oil deals in Angola and the Sudan, as well as metals in the Democratic Republic of Congo (DRC). China’s domestic mining and oil industries are expanding too including coal and oil as China builds, connects and powers its cities along with lighting up its rural countryside (Forney, Research and Markets 2010). As a supplier of extractive and construction industries, MCS would be wise to expand into the Chinese market, which is likely the market with the greatest need and potential for expanding its infrastructure in the near term. China is the world’s most populous nation and among its fastest growing, strongest economies (WTO, Einhorn 2010). The Chinese economy produces both highly skilled, university educated workers with expertise in science and technology as well as a large pool of semi-skilled labourers available for mining and construction. Foreign investors generally rely on local labor at every level of industry. Both the availability of technically skilled and semi-skilled labor at affordable wages are beneficial to an industrial supply company such as MCS. China’s environment is one that is currently under threat from the fast pace of economic expansion. Despite limited regulation of environmental protection or worker protections, both environmental and health and safety issues in industry are slowly beginning to receive more attention (Jared-Perrin 2010). China’s vast geographic size and massive population mean that the nation is very diverse in terms of culture, language and religion. This diversity is an asset in terms the labor force and rarely a hindrance to foreign participation; English is a commonly spoken second language and not infrequently a key language of business. There is much precedent for cross-cultural collaboration between Chinese and Australian business. Legal issues in China have been a source of some consternation, given the tight political and economic control exercised by the Chinese Communist Party. Nevertheless both the freedom of investors and political freedom in the country seem to be making significant strides (Johnson, Einhorn 2010). China is famous for the gender impact of its restrictive “One-Child” policy. As a result of government population control, parents tend to selectively abort female foetuses for economic reasons. Sons, rather than daughters will be financially responsible for their parents in old age. As an aggregate phenomenon, this has had an impact on the population creating an imbalance between young men and young women. For the purposes of industry, this has a significant impact on the labor market, increasing the number of single men in the work force. While this demographic phenomenon may have a negative impact on political stability in the country, it has a positive impact on industry in the short an medium term (Economist, WTO 2010). China is an opportunity that MCS cannot afford to pass up. Both in scope and potential for growth, it is a market for our products that has no equal anywhere in the world. The political and legal environment in China is one that is increasingly favourable to foreign investment. Meanwhile, investment in China may help in the short term to hedge against fluctuations in the global currency market and the negative impacts our business faces as a result of the weak dollar (Bristow 2010). They opportunities in China dwarf those available in a nearly saturated Australian market. Works Cited 1. Forney, M. “China’s quest for oil.” Time Magazine, October 18, 2004. Accessed October 10, 2010. http://www.time.com/time/magazine/article/0,9171,725174,00.html 2. Staff. “China Country Profile.” BBC News, October 6, 2010. Accessed October 10 2010. http://news.bbc.co.uk/2/hi/africa/country_profiles/1287798.stm 3. Staff.” Research and Markets: Chinese Mining Sector: Sector Report.” Business Wire, September 06, 2010. Accessed October 10, 2010. http://findarticles.com/p/articles/mi_m0EIN/is_20100906/ai_n55040451/ 4. Staff.”Trade Profiles: China.” WTO, March 2010. Accessed October 11, 2010. http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=CN 5. Bristow, M.” China to address economic imbalance.”BBC News. October 15, 2010, Accessed October 15, 2010. http://www.bbc.co.uk/news/world-asia-pacific-11548719 6. Staff “China Starts Work on Guangdong Strategic Oil Reserves” Bloomberg Business News. October 15, 2010. Accessed October 15 2010. http://www.businessweek.com/news/2010-03-08/china-starts-work-on-guangdong-strategic-oil-reserves-update2-.html 7. Staff. “Country Briefing: China The Economist. January 16, 2010. Accessed October 12 2010. http://www.economist.com/countries/China/ 8. Jared-Perrin, C. “Chiles mining rescue mortifies Chinas work safety” International Business Times October 14, 2010. Accessed October 15 2010. http://au.ibtimes.com/articles/71699/20101014/as-the-world-was-awed-by-the-successful-rescue-of-chile-s-33-trapped-miners-chinese-netizens-have-ur.htm 9. Einhorn, B. “China’s Foreign Investment Rebounds.” Bloomberg Business News. March 16. 2010. Accessed October 14, 2010. http://www.businessweek.com/blogs/eyeonasia/archives/2010/03/chinas_foreign.html 10. Johnson, I. “China Rights Report Cites Improvements, but Also Failings” New York TImes, Sept 16, 2010. Accessed October 14 2010. http://www.nytimes.com/2010/09/27/world/asia/27china.html Task 7 $500,000 will be borrowed from the banks. Option 1 $500 000 at 7% compounded annually 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 is $240,651.40 Monthly payments are (740,651.40)/60 = $12,344.19 The best option is Option One because less interest is charged during the whole period and the payments are less when compared per annum or per month. 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