Instructions

Using your learning from MBA 520 and MBA 640, analyze the projected costs, revenue streams, and net present value for the concept from launch until two years after the breakeven point. Be sure to include a budget, an assessment of assets and liabilities, your anticipated sources of funding, and the associated costs of attaining that capital as part of the analysis. Justify the analysis with relevant primary and secondary data in an appendix, specifying any relevant assumptions and limitations. You should include, among other support, sales forecasts, cash flow statements, income projections, and any other relevant calculations or financial reports.

For additional details, please refer to the Milestone Four Guidelines and Rubric document and the Final Project Guidelines and Rubric document.

 

 

 

 

 

 

 

 

 

Financial Analysis and Funding

Introduction

Financial analysis involves assessing a company’s financial data and financial statements to determine its performance and assess its suitability to fund the project implementation plan, in this case. Financial analysis and developing a funding plan are critical requirements in the implementation of any projects in a company. The funding plan will enable Starrett Company to know the projected costs and budget of rebranding and integrating the shipping, transportation, and distribution (STD) departments into using the autonomous trucks and an integrated system. In addition, the company will identify the revenue streams they expect within the two years of implementing the project and projected net present value in two years. In this case, the primary purpose of conducting a financial analysis for the Rebranding project is to evaluate the project’s profitability and cost-effectiveness (Gupta, 2017).

Moreover, the financial analysis will influence the decision of Starrett Company on whether the company will continue introducing the autonomous trucks and integrated system in other locations and plants all over the world. In doing so, this paper will analyses components such as the budget, the assets and liability assessments, the net present value, cost of capital, and sources of funding for the projects. In addition, the data and information are backed with relevant financial reports, namely the startup expenses, the sales forecast, operating costs, income statements, and a loan amortization schedule, among others.

Budget Analysis

The budget analysis in this project involves examining and explaining various components of the expenditure and revenue of the project. The estimated budget to rebrand the STD departments is a total of $5,001,731. This project budget will allocate the departments and other stakeholders the necessary funds to build their financial foundation for accomplishing the project’s deliverables and milestones. The highest percentage of the budget, which is approximately 89%, will be allocated to fixed assets such as the building, equipment, autonomous trucks, infrastructure, machinery, and facilities. The remaining 11% will be assigned to the operational costs, such as the wages, supplies, the inventory, marketing and promotion, licenses, and insurance premiums, among others. The distribution of this budget is seen in the chart below, and the summary seen in Appendix 1.

The budget includes the projected costs and revenue of the project in the next three years, which are calculated after the breakeven point. The sales forecast would enable the company to predict and project achievable sales revenues as well as efficiently allocate resources for this accomplishment and completion of the rebranding project. Most importantly, the sales forecast will help the company make essential decisions on future project expansion and plan for their future growth efficiently. According to the calculations and estimates presented in Appendix 2, the estimated revenue in the first year will be $13,930,000, which is made up of 35,000 units and each unit with an assumption of $398 cost. The assumed sales growth rate is 10,000 units annually, whereby the sales growth rate increases in the second year by 29% and decreases by 7% in the following year. However, this does not affect the annual inflow of revenue, as it increases respectively, with the sales growth. The difference in growth and revenues in the three years is -7%. Finally, the estimated gross profits for the three years keeps increasing, showing a growth rate and a cost-effective project. Concisely, the growth rate keeps changing, as it is different in years two and three. The project’s three-year expenses projections are outlined and summarized in Appendix 3, which shows the growth rates of the expenses, which keep fluctuating and are expected to increase over the projected period at the same rate, unlike the revenues. The operating costs and expenses keep rising throughout the three years, which increases by 0.52% in the second year and by 0.67% in the third year.

The breakeven point and year for Starrett Company are estimated to be the first year due to the positive net income, as seen in the Income statement in Appendix 4. To come up with the net income or loss, there is an assumption based on the 2019 annual report of the income tax being 36.7% of the pre-tax income and revenue. Assuming that in the first year the income tax is 37%, and the next two years are constant at 40% and 50% maximum, then Starrett is likely to meet its breakeven point in the first year. Moreover, in the second year, there is a growth in sales by 22% and low expense growth hence $8.2M. In the third year, the sales are expected to drop due to the normalization of the integrated system, the autonomous trucks, and reduced trips. This will result in a decrease in the net income by 4.3% and a forecasted income of $7.9M.

According to Appendix 5, the breakeven point of the project and the company will be in the first year once 807 units are sold. During the sale of the 807 units, the realized costs will include $475,020, with total revenue of $13,930,000 and a net profit of $13,454,980, which aligns and balances with the sales forecast. This information is outlined and summarized in Appendix 5, six, and seven. That describes the possible breakeven point and the graph.

Net Present Value 

The NPV shows the difference between the project’s present value in cash inflows and the possible future current value of the cash flows over the three years. This aspect is essential in this project, as it helps analyze the profitability rates of this project for future decision-making. The values will determine whether the rebranding project is a good or bad investment to Starrett Company (Marsh, 2013). Project comparison among financial analysts can be achieved using the IRR, payback, and NPV methods. However, NPV is most common among financial analysts as it considers the time value of the investment and money, and the value is concrete for managers to make effective comparisons on a project investment or initial cash outlay against the return’s present value. This information is necessary while undertaking the Rebranding project for Starrett and the Project Manager for effective decision-making and future analysis.

The formula used to calculate the NPV of the Rebranding project includes the projected cash flow that is acquired by adding to the net income the depreciation. The depreciation values are added, as they are non-cash items that miss from the calculated cash flows. Below is the projected NPV assuming the discount rate is 10% and the projected cash flow, as seen in Appendix 8. The assumed discount rate depends on the company’s shareholders expected rate of return on the minimal side.

Year	0	1	2	3
Net income	$(5,001,731)	$6,760,481	$8,270,045	$7,917,829
Depreciation	0	$430,750	$430,750	$430,750
Projected cash flow	$(5,001,731)	$7,191,231	$8,700,795	$8,348,579
Net Present Value	$14,998,902.37

 

According to the outcome value of $14,998,902, the project is a good investment, as it is positive. The positive figure shows that the revenue of the project, which is the cash inflow, is more significant than its costs, which are the cash outflows. The project seems profitable, viable, and suitable, as it appears to accomplish the project’s objective of minimizing operational costs and expenses in the STD departments while maximizing the sales, revenues, and profits through multiplied trips and minimized reverse logistics (Gallo, 2014). As stated, if the NPV figure were negative, this would mean an unfortunate investment, as it would drain the company’s funds and capital. However, the value is positive, meaning it is profitable and should be accepted by the company’s project donors and sponsors. In addition, figure $14,998,902 is rather high, showing the more expected and projected profits for Starrett Company through the Rebranding project. This information is essential to the company as it can decide on implementing similar projects in other locations, stores, and plants.

The main problem in the STD was increased operational costs, duplicated functions, and numerous nonvalue-adding activities. With the introduction of the integrated system, these duplicated functions are integrated, thus reducing the nonvalue adding activities and operational costs. Secondly, the autonomous trucks reduce the reverse logistics for the company, increase the sales, profits, and revenue through multiplied trips, and reduced damaged products and tools. The main problems seem to be fixed through the NPV projection of the Rebranding project making it effective, efficient, suitable, and a better investment. One limitation of this calculation is that it relies on the assumptions and estimates, such as the discount rates and the projected cash flow, which are subject to errors. However, in this case, the estimates are double-checked with a high sensitivity analysis based on 2019 annual financial year reports of Starrett Company and previous similar projects.

Assets and Liabilities Assessment 

In addition to analyzing and projecting the project’s profitability, the financial analysis assesses the projected assets and liabilities in Starrett Company. The primary purpose of this assessment is to determine the liquidity status and financial health of the company. Starrett’s total assets and liabilities are analyzed in Appendix 9, whereby, the company’s total assets are estimated to be more than its total liabilities. The results mean that the company is in a good position with high financial performance and health when it can make use of its total assets to minimize and balance its liabilities (SEC, 2020). The working capital ratio is 3.7as; the accounts receivable are higher than the account payables and the inventory balances. The highest percentage of the company’s current assets are the cash, accounts receivable, and the inventory. To some extent, Starrett Company has sufficient liquidity to fund its operations and projects such as this at hand, as the company has available cash and short-term investments that opens the credit line of higher amounts. ,

According to Appendix 9, the company’s total assets in the first year of investment are $18,610,441, while the total liabilities amount to $1,473,672. The big margin is caused by the infancy stage of the project system, and the autonomous trucks. Moreover, the trucks must be used to the deliveries, packaging, traveling, and the entire process. However, with time, the process will become smooth and easy to master, hence, better performance. Nevertheless, for better and higher financial performance and health in a company, the liabilities, and assets values should remain close. This will reduce potential financial threats and the company’s daily operations. In the meantime, the company’s liquidity is good to take up and facilitate the Rebranding project.

Funding Sources

The funding plan for the Rebranding project involves three primary sources of funding and capital, namely, the company’s equity, potential investors, and a loan. According to the distribution and table below, the owner’s equity will take up 50%, which is $2,800,970; the credit will take up 30%, which is $1,500,519 payable in 60 months with a 9% rate, and finally, investors 20%, equivalent to $700,242.

Sources of Funding	Percentage	Totals	Loan Rate	Term in Months	Monthly Payments
Owner’s Equity	50%	$2,800,970
Outside Investors	20%	$700,242
Commercial Loan	30%	$1,500,519	9%	60 months	$25,010
Total Sources of Funding	100%	$5,001,731

 

As per the distribution above, the owner’s equity funds half the project but is inadequate due to other projects. Starrett Company has the capacity to funds its own projects as seen from its financial performance liquidity and health, and it is due to this that the company funds half the project. Nevertheless, the outside investors will fund 20% of the project using ordinary shares and the remaining 30% coming from a commercial loan. The loan is payable in 60 months, with an interest rate of 9%. Within the first year in the amortization schedule, the estimated interest will be $11,253, a principle of $19,894.41, and an initial payment of $31,148.31. Therefore, the total interest amount in the first year will be $135,036, while in the five years; the interest will accumulate to $675,180. The total amount to be paid by the company to complete the loan will be $2,175,701. Overlay, the funding plan of the Rebranding project is composed of these sources, as well as calculations and estimations on the repayments of the loan.

 

Cost of Capital

The cost of capital is the estimated or required return when making a capital budget for projects to determine their profitability, effectiveness, and suitability. This element of financial analysis will enable Starrett Company among other involved project stakeholders to identify and determine whether the Rebranding project is worth the risk while comparing with the returns (Brealey, 2011). The equity and debts to be used to fund this project are all associated with potential costs, with the initial costs being the commercial loan. The monthly interest payments are the primary sources of the increased corporate financial costs for the project, as well as the loan agreement costs and any other associated loan when applying for any loan. Overall, as the project progresses, high profits are expected; hence the paying of shareholder dividends will be maximized. Once the dividends are paid to the shareholders, the primary source of equity capital will be realized. The more equity capital is recognized in exchange for preferred stocks will increase the cost capital of the project. However, as discussed earlier, there are indirect costs even in equity capital, such as costs incurred when floating the shares to the public and the investors, and during the preparation of reports and meetings. The ultimate decision of the company on what source to use will depend on the available funding type of the company.

 

References

Brealey, R. A. (2011). Capital budgeting. Milano: McGraw-Hill Companies.

Gallo, A. (2014, November 19). A Refresher on Net Present Value. Harvard Business Review.

Gupta, A. (2017). PROJECT APPRAISAL AND FINANCING. New Delhi: PHI Learning.

Marsh, C. (2013). Business and financial models. London: Kogan Page.

SEC. (2020). Form 10-K Starrett L S Company For the Year Ended June 30, 2019. Washington, DC: SEC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix I: Budget Summary
Fixed Assets	Amount	Depreciation (years)
Autonomous trucks	$2,100,540	5
Buildings and Facilities	$127,500	20
Equipment	$203,700	7
Furniture and Fixtures	$519,000	7
Infrastructure	$1M	5
Other	$500,800	5
TOTAL	$4,451,540	89%
Operating Costs	Amount
Salaries and Wages	$205,000
Prepaid Insurance Premiums	$10,970
Inventory	$110,000
Legal and Accounting Fees	$10,200
Supplies	$136,000
Advertising and Promotions	$22,900
Licenses	$15,560
Other Initial Start-Up Costs	$22,430
Working Capital (Cash On Hand)	$17,131
TOTAL OPERATING CAPITAL	$550,191 (11%)
TOTAL REQUIRED FUNDS	$5,001,731

 

Appendix 2: SALES FORECAST

 

 

APPENDIX 3: OPERATIONAL COSTS

Line Item/Year	1	Growth Rate	2	Growth Rate	3
Advertising	$12,000	1.0%	$12,120	-2.0%	$11,878
Commissions and Fees	$7,310	0.0%	$7,310	0.0%	$7,310
Contract Labor (Not included in payroll)	$7,200	1.0%	$7,272	2.0%	$ 7,417
Insurance (other than health)	$18,000	-3.0%	$17,460	-1.0%	$17,285
Legal and Professional Services	$4,320	0.0%	$4,320	0.0%	$ 4,320
Licenses	$4,800	2.0%	$4,896	1.0%	$ 4,945
Office Expense	$10,974	0.0%	$10,974	1.0%	$11,084
Rent or Lease — Vehicles, Machinery, Equipment	$8,472	1.0%	$8,557	1.0%	$8,642
Rent or Lease — Other Business Property	$4,140	3.0%	$ 4,264	3.0%	$4,392
Repairs and Maintenance	$ 7,200	2.0%	$7,344	2.0%	$7,491
Supplies	$15,000	3.0%	$15,450	3.0%	$15,914
Travel, Meals and Entertainment	$4,344	1.0%	$4,387	1.0%	$4,431
Utilities	$2,400	-3.0%	$2,328	0.0%	$2,328
Miscellaneous	$6,360	1.0%	$6,424	0.0%	$ 6,424
Total Expenses	$112,520		$113,106		$113,861
Other Expenses
Depreciation	$430,750		$430,750		$430,750
Interest	–
Commercial Loan	$26,258		$23,168		$19,789
Bad Debt Expense	$200		$200		$200
Total Other Expenses	$437,691		$454,118		$450,739
Total Operating Expenses	$550,191		$567,224		$564,599

 

 

APPENDIX 4: INCOME STATEMENT

Revenue	1		2		3
Products and Tools	$420,000		$540,000		$660,000
Total Revenue	$13,930,000	100%	$17,910,000	29%	$21,890,000	22%
Total Cost of Goods Sold	$1,147,708	100%	$1,475,625	29%	$1,803,542	22%
Gross Margin	$12,782,292	100%	$16,434,375	29%	$20,086,458	22%
Salaries and wages	$205,000	–	$320,000	–	$545,169
Advertising	$12,000	1.0%	$12,120	-2.0%	$11,878
Commissions and Fees	$7,310	0.0%	$7,310	0.0%	$7,310
Contract Labor (Not included in payroll)	$7,200	1.0%	$7,272	2.0%	$ 7,417
Insurance (other than health)	$18,000	(3.0)%	$17,460	-1.0%	$17,285
Legal and Professional Services	$4,320	0.0%	$4,320	0.0%	$ 4,320
Licenses	$4,800	2.0%	$4,896	1.0%	$ 4,945
Office Expense	$10,974	0.0%	$10,974	1.0%	$11,084
Rent or Lease- Vehicles, Machinery, Equipment	$8,472	1.0%	$8,557	1.0%	$8,642
Rent or Lease — Other Business Property	$4,140	3.0%	$ 4,264	3.0%	$4,392
Repairs and Maintenance	$ 7,200	2.0%	$7,344	2.0%	$7,491
Supplies	$15,000	3.0%	$15,450	3.0%	$15,914
Travel, Meals and Entertainment	$4,344	1.0%	$4,387	1.0%	$4,431
Utilities	$2,400	-3.0%	$2,328	0.0%	$2,328
Miscellaneous	$6,360	1.0%	$6,424	0.0%	$ 6,424
Total Expenses	$112,520		$113,106		$113,861
Other Expenses
Income (Before Other Expenses)	$12,464,772		$16,001,269	28%	$19,427,428	21%
Other Expenses
Amortized Start-up Expenses	–		–		–
Depreciation	$430,750		$430,750		$430,750
Interest
Commercial Loan	$26,258	–	$ 23,168	–	$19,789
Bad Debt Expense	$200		$200		$200
Total Other Expenses	$437,691		$454,118		$450,739
Total Operating Expenses	$550,191		$567,224		$564,599
Net Income Before Income Tax	$11,914,581		$15,434,045		$18,862,829
Income Tax	$5,154,000	37%	$7,164,000	40%	$10,945,000	50%
Net Income/Loss	$6,760,481		$8,270,045	22%	$7,917,829	-4.3%

 

APPENDIX 5: BREAKEVEN ANALYSIS (YEAR, 1)

Gross Margin % of Sales
Gross Margin	$12,782,292
Total Sales	$ 13,930,000
Gross Margin/Total Sales	92%
Total Fixed Expenses
Salaries and wages	$205,000
Operating Expenses	$112,520
Operating + Salaries and wages	$317,520
Breakeven Sales in Dollars (Annual)
Gross Margin % of Sales	92%
Total Fixed Expenses	$317,520
Yearly Breakeven Amount	$320,390
Monthly Breakeven Amount	$26,699

APPENDIX 6: BREAKEVEN ANALYSIS CHART

APPENDIX 7: BREAKEVEN UNIT ANALYSIS

Units	Variable Costs	Total Costs	Total Revenue	Net Profit
0	$0	$317520	$0	-$317520
1000	$4500	$322020	$398000	$75980
2000	$9000	$326520	$796000	$469480
3000	$13500	$331020	$1194000	$862980
4000	$18000	$335520	$1592000	$1256480
5000	$22500	$340020	$1990000	$1649980
6000	$27000	$344520	$2388000	$2043480
7000	$31500	$349020	$2786000	$2436980
8000	$36000	$353520	$3184000	$2830480
9000	$40500	$358020	$3582000	$3223980
10000	$45000	$362520	$3980000	$3617480
11000	$49500	$367020	$4378000	$4010980
12000	$54000	$371520	$4776000	$4404480
13000	$58500	$376020	$5174000	$4797980
14000	$63000	$380520	$5572000	$5191480
15000	$67500	$385020	$5970000	$5584980
16000	$72000	$389520	$6368000	$5978480
17000	$76500	$394020	$6766000	$6371980
18000	$81000	$398520	$7164000	$6765480
19000	$85500	$403020	$7562000	$7158980
20000	$90000	$407520	$7960000	$7552480
21000	$94500	$412020	$8358000	$7945980
22000	$99000	$416520	$8756000	$8339480
23000	$103500	$421020	$9154000	$8732980
24000	$108000	$425520	$9552000	$9126480
25000	$112500	$430020	$9950000	$9519980
26000	$117000	$434520	$10348000	$9913480
27000	$121500	$439020	$10746000	$10306980
28000	$126000	$443520	$11144000	$10700480
29000	$130500	$448020	$11542000	$11093980
30000	$135000	$452520	$11940000	$11487480
31000	$139500	$457020	$12338000	$11880980
32000	$144000	$461520	$12736000	$12274480
33000	$148500	$466020	$13134000	$12667980
34000	$153000	$470520	$13532000	$13061480
35000	$157500	$475020	$13930000	$13454980

 

APPENDICES 8: CASH FLOW STATEMENT

			1	2	3
Starting Balance			0	$1,000,000	$1,200,000
Cash Inflows
Accounts Receivable			$13,930,000	$17,910,000	$21,890,000
Total Cash Inflows			$13,930,000	$18,910,000	$23,090,000
Cash Outflows
Investing Activities
New Fixed Asset Purchases			–	–	–
Additional Inventory			$110,000	$80,560	$2,700,958
Cost of Goods Sold			$1,147,708	$1,475,625	$1,803,542
Operating Activities
Operating Expenses			$112,520	$113,106	$113,861
Salaries and Wages			$205,000	$320,000	$545,169
Taxes			$2,018	$21,528	$53,879
Financing Activities
Loan Payments			$25,010	$25,010	$25,010
Total Cash Outflows			$1,602,256	$2,035,829	$2,418,970
Net Cash Flows			$12,327,744	$16,874,171	$16,148,581
Operating Cash Balance			$(11,327,744)	$(15,674,171)	$(15,191,581)
Ending Cash Balance			$1,000,000	$1,200,000	$957,000

 

 

 

APPENDIX 9: STARRETT BALANCE SHEET

ASSETS	1	2	3
Current Assets
Cash	$1,000,000	$1,200,000	$957,000
Accounts Receivable	$13,930,000	$17,910,000	$12,890,000
Inventory	$110,000	$80,560	$2,700,958
Other Initial Costs	$550,191	$567,224	$564,599
Total Current Assets	$15,590,191	$ 19,757,784	$ 17,112,557
Fixed Assets
Buildings and facilities	$127,500	$127,500	$127,500
Equipment	$203,700	$203,700	$203,700
Furniture and Fixtures	$519,000	$519,000	$519,000
Autonomous trucks	$2,100,000	$2,100,000	$2,100,000
Other	$500,800	$500,800	$500,800
Total Fixed Assets	$3,451,000	$3,451,000	$3,451,000
(Less Accumulated Depreciation)	$430,750	$430,750	$430,750
Total Assets	$18,610,441	$22,778,034	$20,132,807
LIABILITIES & EQUITY
Liabilities
Accounts Payable	$1,200,000	$2,141,254	$1,957,524
Commercial Loan Balance	$273,672	$237,644	$198,235
Total  Liabilities	$1,473,672	$2,378,898	$2,155,759
Equity
Common Stock	$ 690,000	$690,000	$690,000
Retained Earnings	$804,900	$1,200,245	$941,598
Total Equity	$1,494,900	$1,890,245	$1,631,598
Total Liabilities and Equity	$2,968,572	$4,269,143	$3,787,357

 

 

 

 

 

 

 

 

 

 

Financial Analysis and Funding

Name of the student

Course

Instructor’s name

Submission date

 

Financial Analysis and Funding

Introduction

Financial analysis involves assessing a company’s financial data and financial statements to determine its performance and assess its suitability to fund the project implementation plan, in this case. Financial analysis and developing a funding plan are critical requirements in the implementation of any projects in a company. The funding plan will enable Starrett Company to know the projected costs and budget of rebranding and integrating the shipping, transportation, and distribution (STD) departments into using the autonomous trucks and an integrated system. In addition, the company will identify the revenue streams they expect within the two years of implementing the project and projected net present value in two years. In this case, the primary purpose of conducting a financial analysis for the Rebranding project is to evaluate the project’s profitability and cost-effectiveness (Gupta, 2017).

Moreover, the financial analysis will influence the decision of Starrett Company on whether the company will continue introducing the autonomous trucks and integrated system in other locations and plants all over the world. In doing so, this paper will analyses components such as the budget, the assets and liability assessments, the net present value, cost of capital, and sources of funding for the projects. In addition, the data and information are backed with relevant financial reports, namely the startup expenses, the sales forecast, operating costs, income statements, and a loan amortization schedule, among others.

Budget Analysis

The budget analysis in this project involves examining and explaining various components of the expenditure and revenue of the project. The estimated budget to rebrand the STD departments is a total of $5,001,731. This project budget will allocate the departments and other stakeholders the necessary funds to build their financial foundation for accomplishing the project’s deliverables and milestones. The highest percentage of the budget, which is approximately 89%, will be allocated to fixed assets such as the building, equipment, autonomous trucks, infrastructure, machinery, and facilities. The remaining 11% will be assigned to the operational costs, such as the wages, supplies, the inventory, marketing and promotion, licenses, and insurance premiums, among others. The distribution of this budget is seen in the chart below, and the summary seen in Appendix 1.

The budget includes the projected costs and revenue of the project in the next three years, which are calculated after the breakeven point. The sales forecast would enable the company to predict and project achievable sales revenues as well as efficiently allocate resources for this accomplishment and completion of the rebranding project. Most importantly, the sales forecast will help the company make essential decisions on future project expansion and plan for their future growth efficiently. According to the calculations and estimates presented in Appendix 2, the estimated revenue in the first year will be $13,930,000, which is made up of 35,000 units and each unit with an assumption of $398 cost. The assumed sales growth rate is 10,000 units annually, whereby the sales growth rate increases in the second year by 29% and decreases by 7% in the following year. However, this does not affect the annual inflow of revenue, as it increases respectively, with the sales growth. The difference in growth and revenues in the three years is -7%. Finally, the estimated gross profits for the three years keeps increasing, showing a growth rate and a cost-effective project. Concisely, the growth rate keeps changing, as it is different in years two and three. The project’s three-year expenses projections are outlined and summarized in Appendix 3, which shows the growth rates of the expenses, which keep fluctuating and are expected to increase over the projected period at the same rate, unlike the revenues. The operating costs and expenses keep rising throughout the three years, which increases by 0.52% in the second year and by 0.67% in the third year.

The breakeven point and year for Starrett Company are estimated to be the first year due to the positive net income, as seen in the Income statement in Appendix 4. To come up with the net income or loss, there is an assumption based on the 2019 annual report of the income tax being 36.7% of the pre-tax income and revenue. Assuming that in the first year the income tax is 37%, and the next two years are constant at 40% and 50% maximum, then Starrett is likely to meet its breakeven point in the first year. Moreover, in the second year, there is a growth in sales by 22% and low expense growth hence $8.2M. In the third year, the sales are expected to drop due to the normalization of the integrated system, the autonomous trucks, and reduced trips. This will result in a decrease in the net income by 4.3% and a forecasted income of $7.9M.

According to Appendix 5, the breakeven point of the project and the company will be in the first year once 807 units are sold. During the sale of the 807 units, the realized costs will include $475,020, with total revenue of $13,930,000 and a net profit of $13,454,980, which aligns and balances with the sales forecast. This information is outlined and summarized in Appendix 5, six, and seven. That describes the possible breakeven point and the graph.

Net Present Value 

The NPV shows the difference between the project’s present value in cash inflows and the possible future current value of the cash flows over the three years. This aspect is essential in this project, as it helps analyze the profitability rates of this project for future decision-making. The values will determine whether the rebranding project is a good or bad investment to Starrett Company (Marsh, 2013). Project comparison among financial analysts can be achieved using the IRR, payback, and NPV methods. However, NPV is most common among financial analysts as it considers the time value of the investment and money, and the value is concrete for managers to make effective comparisons on a project investment or initial cash outlay against the return’s present value. This information is necessary while undertaking the Rebranding project for Starrett and the Project Manager for effective decision-making and future analysis.

The formula used to calculate the NPV of the Rebranding project includes the projected cash flow that is acquired by adding to the net income the depreciation. The depreciation values are added, as they are non-cash items that miss from the calculated cash flows. Below is the projected NPV assuming the discount rate is 10% and the projected cash flow, as seen in Appendix 8. The assumed discount rate depends on the company’s shareholders expected rate of return on the minimal side.

Year	0	1	2	3
Net income	$(5,001,731)	$6,760,481	$8,270,045	$7,917,829
Depreciation	0	$430,750	$430,750	$430,750
Projected cash flow	$(5,001,731)	$7,191,231	$8,700,795	$8,348,579
Net Present Value	$14,998,902.37

 

According to the outcome value of $14,998,902, the project is a good investment, as it is positive. The positive figure shows that the revenue of the project, which is the cash inflow, is more significant than its costs, which are the cash outflows. The project seems profitable, viable, and suitable, as it appears to accomplish the project’s objective of minimizing operational costs and expenses in the STD departments while maximizing the sales, revenues, and profits through multiplied trips and minimized reverse logistics (Gallo, 2014). As stated, if the NPV figure were negative, this would mean an unfortunate investment, as it would drain the company’s funds and capital. However, the value is positive, meaning it is profitable and should be accepted by the company’s project donors and sponsors. In addition, figure $14,998,902 is rather high, showing the more expected and projected profits for Starrett Company through the Rebranding project. This information is essential to the company as it can decide on implementing similar projects in other locations, stores, and plants.

The main problem in the STD was increased operational costs, duplicated functions, and numerous nonvalue-adding activities. With the introduction of the integrated system, these duplicated functions are integrated, thus reducing the nonvalue adding activities and operational costs. Secondly, the autonomous trucks reduce the reverse logistics for the company, increase the sales, profits, and revenue through multiplied trips, and reduced damaged products and tools. The main problems seem to be fixed through the NPV projection of the Rebranding project making it effective, efficient, suitable, and a better investment. One limitation of this calculation is that it relies on the assumptions and estimates, such as the discount rates and the projected cash flow, which are subject to errors. However, in this case, the estimates are double-checked with a high sensitivity analysis based on 2019 annual financial year reports of Starrett Company and previous similar projects.

Assets and Liabilities Assessment 

In addition to analyzing and projecting the project’s profitability, the financial analysis assesses the projected assets and liabilities in Starrett Company. The primary purpose of this assessment is to determine the liquidity status and financial health of the company. Starrett’s total assets and liabilities are analyzed in Appendix 9, whereby, the company’s total assets are estimated to be more than its total liabilities. The results mean that the company is in a good position with high financial performance and health when it can make use of its total assets to minimize and balance its liabilities (SEC, 2020). The working capital ratio is 3.7as; the accounts receivable are higher than the account payables and the inventory balances. The highest percentage of the company’s current assets are the cash, accounts receivable, and the inventory. To some extent, Starrett Company has sufficient liquidity to fund its operations and projects such as this at hand, as the company has available cash and short-term investments that opens the credit line of higher amounts. ,

According to Appendix 9, the company’s total assets in the first year of investment are $18,610,441, while the total liabilities amount to $1,473,672. The big margin is caused by the infancy stage of the project system, and the autonomous trucks. Moreover, the trucks must be used to the deliveries, packaging, traveling, and the entire process. However, with time, the process will become smooth and easy to master, hence, better performance. Nevertheless, for better and higher financial performance and health in a company, the liabilities, and assets values should remain close. This will reduce potential financial threats and the company’s daily operations. In the meantime, the company’s liquidity is good to take up and facilitate the Rebranding project.

Funding Sources

The funding plan for the Rebranding project involves three primary sources of funding and capital, namely, the company’s equity, potential investors, and a loan. According to the distribution and table below, the owner’s equity will take up 50%, which is $2,800,970; the credit will take up 30%, which is $1,500,519 payable in 60 months with a 9% rate, and finally, investors 20%, equivalent to $700,242.

Sources of Funding	Percentage	Totals	Loan Rate	Term in Months	Monthly Payments
Owner’s Equity	50%	$2,800,970
Outside Investors	20%	$700,242
Commercial Loan	30%	$1,500,519	9%	60 months	$25,010
Total Sources of Funding	100%	$5,001,731

 

As per the distribution above, the owner’s equity funds half the project but is inadequate due to other projects. Starrett Company has the capacity to funds its own projects as seen from its financial performance liquidity and health, and it is due to this that the company funds half the project. Nevertheless, the outside investors will fund 20% of the project using ordinary shares and the remaining 30% coming from a commercial loan. The loan is payable in 60 months, with an interest rate of 9%. Within the first year in the amortization schedule, the estimated interest will be $11,253, a principle of $19,894.41, and an initial payment of $31,148.31. Therefore, the total interest amount in the first year will be $135,036, while in the five years; the interest will accumulate to $675,180. The total amount to be paid by the company to complete the loan will be $2,175,701. Overlay, the funding plan of the Rebranding project is composed of these sources, as well as calculations and estimations on the repayments of the loan.

 

Cost of Capital

The cost of capital is the estimated or required return when making a capital budget for projects to determine their profitability, effectiveness, and suitability. This element of financial analysis will enable Starrett Company among other involved project stakeholders to identify and determine whether the Rebranding project is worth the risk while comparing with the returns (Brealey, 2011). The equity and debts to be used to fund this project are all associated with potential costs, with the initial costs being the commercial loan. The monthly interest payments are the primary sources of the increased corporate financial costs for the project, as well as the loan agreement costs and any other associated loan when applying for any loan. Overall, as the project progresses, high profits are expected; hence the paying of shareholder dividends will be maximized. Once the dividends are paid to the shareholders, the primary source of equity capital will be realized. The more equity capital is recognized in exchange for preferred stocks will increase the cost capital of the project. However, as discussed earlier, there are indirect costs even in equity capital, such as costs incurred when floating the shares to the public and the investors, and during the preparation of reports and meetings. The ultimate decision of the company on what source to use will depend on the available funding type of the company.

 

References

Brealey, R. A. (2011). Capital budgeting. Milano: McGraw-Hill Companies.

Gallo, A. (2014, November 19). A Refresher on Net Present Value. Harvard Business Review.

Gupta, A. (2017). PROJECT APPRAISAL AND FINANCING. New Delhi: PHI Learning.

Marsh, C. (2013). Business and financial models. London: Kogan Page.

SEC. (2020). Form 10-K Starrett L S Company For the Year Ended June 30, 2019. Washington, DC: SEC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix I: Budget Summary
Fixed Assets	Amount	Depreciation (years)
Autonomous trucks	$2,100,540	5
Buildings and Facilities	$127,500	20
Equipment	$203,700	7
Furniture and Fixtures	$519,000	7
Infrastructure	$1M	5
Other	$500,800	5
TOTAL	$4,451,540	89%
Operating Costs	Amount
Salaries and Wages	$205,000
Prepaid Insurance Premiums	$10,970
Inventory	$110,000
Legal and Accounting Fees	$10,200
Supplies	$136,000
Advertising and Promotions	$22,900
Licenses	$15,560
Other Initial Start-Up Costs	$22,430
Working Capital (Cash On Hand)	$17,131
TOTAL OPERATING CAPITAL	$550,191 (11%)
TOTAL REQUIRED FUNDS	$5,001,731

 

Appendix 2: SALES FORECAST

 

 

APPENDIX 3: OPERATIONAL COSTS

Line Item/Year	1	Growth Rate	2	Growth Rate	3
Advertising	$12,000	1.0%	$12,120	-2.0%	$11,878
Commissions and Fees	$7,310	0.0%	$7,310	0.0%	$7,310
Contract Labor (Not included in payroll)	$7,200	1.0%	$7,272	2.0%	$ 7,417
Insurance (other than health)	$18,000	-3.0%	$17,460	-1.0%	$17,285
Legal and Professional Services	$4,320	0.0%	$4,320	0.0%	$ 4,320
Licenses	$4,800	2.0%	$4,896	1.0%	$ 4,945
Office Expense	$10,974	0.0%	$10,974	1.0%	$11,084
Rent or Lease — Vehicles, Machinery, Equipment	$8,472	1.0%	$8,557	1.0%	$8,642
Rent or Lease — Other Business Property	$4,140	3.0%	$ 4,264	3.0%	$4,392
Repairs and Maintenance	$ 7,200	2.0%	$7,344	2.0%	$7,491
Supplies	$15,000	3.0%	$15,450	3.0%	$15,914
Travel, Meals and Entertainment	$4,344	1.0%	$4,387	1.0%	$4,431
Utilities	$2,400	-3.0%	$2,328	0.0%	$2,328
Miscellaneous	$6,360	1.0%	$6,424	0.0%	$ 6,424
Total Expenses	$112,520		$113,106		$113,861
Other Expenses
Depreciation	$430,750		$430,750		$430,750
Interest	–
Commercial Loan	$26,258		$23,168		$19,789
Bad Debt Expense	$200		$200		$200
Total Other Expenses	$437,691		$454,118		$450,739
Total Operating Expenses	$550,191		$567,224		$564,599

 

 

APPENDIX 4: INCOME STATEMENT

Revenue	1		2		3
Products and Tools	$420,000		$540,000		$660,000
Total Revenue	$13,930,000	100%	$17,910,000	29%	$21,890,000	22%
Total Cost of Goods Sold	$1,147,708	100%	$1,475,625	29%	$1,803,542	22%
Gross Margin	$12,782,292	100%	$16,434,375	29%	$20,086,458	22%
Salaries and wages	$205,000	–	$320,000	–	$545,169
Advertising	$12,000	1.0%	$12,120	-2.0%	$11,878
Commissions and Fees	$7,310	0.0%	$7,310	0.0%	$7,310
Contract Labor (Not included in payroll)	$7,200	1.0%	$7,272	2.0%	$ 7,417
Insurance (other than health)	$18,000	(3.0)%	$17,460	-1.0%	$17,285
Legal and Professional Services	$4,320	0.0%	$4,320	0.0%	$ 4,320
Licenses	$4,800	2.0%	$4,896	1.0%	$ 4,945
Office Expense	$10,974	0.0%	$10,974	1.0%	$11,084
Rent or Lease- Vehicles, Machinery, Equipment	$8,472	1.0%	$8,557	1.0%	$8,642
Rent or Lease — Other Business Property	$4,140	3.0%	$ 4,264	3.0%	$4,392
Repairs and Maintenance	$ 7,200	2.0%	$7,344	2.0%	$7,491
Supplies	$15,000	3.0%	$15,450	3.0%	$15,914
Travel, Meals and Entertainment	$4,344	1.0%	$4,387	1.0%	$4,431
Utilities	$2,400	-3.0%	$2,328	0.0%	$2,328
Miscellaneous	$6,360	1.0%	$6,424	0.0%	$ 6,424
Total Expenses	$112,520		$113,106		$113,861
Other Expenses
Income (Before Other Expenses)	$12,464,772		$16,001,269	28%	$19,427,428	21%
Other Expenses
Amortized Start-up Expenses	–		–		–
Depreciation	$430,750		$430,750		$430,750
Interest
Commercial Loan	$26,258	–	$ 23,168	–	$19,789
Bad Debt Expense	$200		$200		$200
Total Other Expenses	$437,691		$454,118		$450,739
Total Operating Expenses	$550,191		$567,224		$564,599
Net Income Before Income Tax	$11,914,581		$15,434,045		$18,862,829
Income Tax	$5,154,000	37%	$7,164,000	40%	$10,945,000	50%
Net Income/Loss	$6,760,481		$8,270,045	22%	$7,917,829	-4.3%

 

APPENDIX 5: BREAKEVEN ANALYSIS (YEAR, 1)

Gross Margin % of Sales
Gross Margin	$12,782,292
Total Sales	$ 13,930,000
Gross Margin/Total Sales	92%
Total Fixed Expenses
Salaries and wages	$205,000
Operating Expenses	$112,520
Operating + Salaries and wages	$317,520
Breakeven Sales in Dollars (Annual)
Gross Margin % of Sales	92%
Total Fixed Expenses	$317,520
Yearly Breakeven Amount	$320,390
Monthly Breakeven Amount	$26,699

APPENDIX 6: BREAKEVEN ANALYSIS CHART

APPENDIX 7: BREAKEVEN UNIT ANALYSIS

Units	Variable Costs	Total Costs	Total Revenue	Net Profit
0	$0	$317520	$0	-$317520
1000	$4500	$322020	$398000	$75980
2000	$9000	$326520	$796000	$469480
3000	$13500	$331020	$1194000	$862980
4000	$18000	$335520	$1592000	$1256480
5000	$22500	$340020	$1990000	$1649980
6000	$27000	$344520	$2388000	$2043480
7000	$31500	$349020	$2786000	$2436980
8000	$36000	$353520	$3184000	$2830480
9000	$40500	$358020	$3582000	$3223980
10000	$45000	$362520	$3980000	$3617480
11000	$49500	$367020	$4378000	$4010980
12000	$54000	$371520	$4776000	$4404480
13000	$58500	$376020	$5174000	$4797980
14000	$63000	$380520	$5572000	$5191480
15000	$67500	$385020	$5970000	$5584980
16000	$72000	$389520	$6368000	$5978480
17000	$76500	$394020	$6766000	$6371980
18000	$81000	$398520	$7164000	$6765480
19000	$85500	$403020	$7562000	$7158980
20000	$90000	$407520	$7960000	$7552480
21000	$94500	$412020	$8358000	$7945980
22000	$99000	$416520	$8756000	$8339480
23000	$103500	$421020	$9154000	$8732980
24000	$108000	$425520	$9552000	$9126480
25000	$112500	$430020	$9950000	$9519980
26000	$117000	$434520	$10348000	$9913480
27000	$121500	$439020	$10746000	$10306980
28000	$126000	$443520	$11144000	$10700480
29000	$130500	$448020	$11542000	$11093980
30000	$135000	$452520	$11940000	$11487480
31000	$139500	$457020	$12338000	$11880980
32000	$144000	$461520	$12736000	$12274480
33000	$148500	$466020	$13134000	$12667980
34000	$153000	$470520	$13532000	$13061480
35000	$157500	$475020	$13930000	$13454980

 

APPENDICES 8: CASH FLOW STATEMENT

			1	2	3
Starting Balance			0	$1,000,000	$1,200,000
Cash Inflows
Accounts Receivable			$13,930,000	$17,910,000	$21,890,000
Total Cash Inflows			$13,930,000	$18,910,000	$23,090,000
Cash Outflows
Investing Activities
New Fixed Asset Purchases			–	–	–
Additional Inventory			$110,000	$80,560	$2,700,958
Cost of Goods Sold			$1,147,708	$1,475,625	$1,803,542
Operating Activities
Operating Expenses			$112,520	$113,106	$113,861
Salaries and Wages			$205,000	$320,000	$545,169
Taxes			$2,018	$21,528	$53,879
Financing Activities
Loan Payments			$25,010	$25,010	$25,010
Total Cash Outflows			$1,602,256	$2,035,829	$2,418,970
Net Cash Flows			$12,327,744	$16,874,171	$16,148,581
Operating Cash Balance			$(11,327,744)	$(15,674,171)	$(15,191,581)
Ending Cash Balance			$1,000,000	$1,200,000	$957,000

 

 

 

APPENDIX 9: STARRETT BALANCE SHEET

ASSETS	1	2	3
Current Assets
Cash	$1,000,000	$1,200,000	$957,000
Accounts Receivable	$13,930,000	$17,910,000	$12,890,000
Inventory	$110,000	$80,560	$2,700,958
Other Initial Costs	$550,191	$567,224	$564,599
Total Current Assets	$15,590,191	$ 19,757,784	$ 17,112,557
Fixed Assets
Buildings and facilities	$127,500	$127,500	$127,500
Equipment	$203,700	$203,700	$203,700
Furniture and Fixtures	$519,000	$519,000	$519,000
Autonomous trucks	$2,100,000	$2,100,000	$2,100,000
Other	$500,800	$500,800	$500,800
Total Fixed Assets	$3,451,000	$3,451,000	$3,451,000
(Less Accumulated Depreciation)	$430,750	$430,750	$430,750
Total Assets	$18,610,441	$22,778,034	$20,132,807
LIABILITIES & EQUITY
Liabilities
Accounts Payable	$1,200,000	$2,141,254	$1,957,524
Commercial Loan Balance	$273,672	$237,644	$198,235
Total  Liabilities	$1,473,672	$2,378,898	$2,155,759
Equity
Common Stock	$ 690,000	$690,000	$690,000
Retained Earnings	$804,900	$1,200,245	$941,598
Total Equity	$1,494,900	$1,890,245	$1,631,598
Total Liabilities and Equity	$2,968,572	$4,269,143	$3,787,357