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DuoLever Financial Analysis Assignment

Case Study - DuoLever Limited

Question: Prepare a spreadsheet financial analysis of the proposed options and a memo to DuoLever's CEO that briefly explains and justifies your chosen methods, inputs and any assumptions made, summarises your findings, and presents your recommendations on the proposed options. Ensure you not only address base case cash flows but also analyse potential uncertainty.

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Solution:

MEMORANDUM
TO: the Chief Executive Officer of Duo Levr Ltd.
FROM: the financial accountant
DATE: 11th of May, 2019

SUBJECT: Assessment and selection of the proposal available undertaking steps towards environmental protection

This letter is to inform you that the business is now willing to undertake one of the two options available before its side for better business practices and our continuous commitment towards our external community. Due to several environmental protection reasons, the company wants to use its waste plastic through recycling methods and thus ensure to adopt better sustainable practices. The two options available before its eyesight are as follows:

• The company can add to its business portfolio its produced sachet plastic through better recycling methods and use it for normal sales of its products; or
• It can license use of the patents by another organization

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In this fast pacing era of industrialization and robust development, companies are growing and becoming more conscious towards the environment and the community they operate in. they feel a sense of responsibility towards its external environment and thus can ensure to attain public and investor confidence in the mean while. Adoption of corporate social responsibility can increase profits for our entity even if we continue with our existing business processes. It shall allow us to expand in the market by ensuring longevity and enhanced market share. Keeping this in mind, our company has conducted various research and development programs to be well aware of its activities that may cause a concern to the environment adversely either directly or indirectly. Such reports revealed that our business organization is now producing approximately 8 metric tonnes of waste products which is shamelessly dumped in land, air or water causing several incurable diseases to breed. Such pollution can tend to cost us on our financial health leaving a question mark on our survival and our business practices. Further investigations prove this to double in the next fifteen years by 2025. This might prove injurious to the health of the organization affecting the financial profits, goodwill and the confidence that our clients and investors lay on us. This research had cost us a significant sum of $ 50 million to bring forth the above mentioned proposal before us. Since this cost is incurred before any of the proposal gets affected, it is termed as sunk costs. Sunk costs are those expenditures that do not tend to influence the decision in either selecting or rejecting the proposals and have been incurred before the proposals have come to their notice.

The first proposal allows our financial entity to use the waste plastic in sachets that we sell to our clients through effective and efficient recycling methods. This shall ensure the sales revenue of our organization to inflate by a significant 2% every year. This would allow us to invest in the project by making a capital expenditure of $ 20 million in the purchase of necessary plant and equipment for the same. Such asset shall have no salvage value at the end of the life of the project. Hence, depreciation shall be charged at the rate of 20% per annum under the straight line method. Such plant shall be replaced by the new one if we wish to continue with the same. Our organization can raise the funds required for buying the machinery through raising of debt charging interest at the rate of 7% per annum over the duration of the project. Our revenue shall augment so high that we shall be able to bear such high interest charges as well. Not only shall the sales increase for our entity on one hand, the variable costs on the other hand shall witness a sharp decline too. Adoption of this proposal shall allow reduction of total variable costs by a magnificent 15% through better application of cost saving methods and procedures. It shall also enable avoidance of supplier margin. This shall however be offset with the rise in our liability towards paying our new business partner, Clean World Ltd. apart from this cost, all other costs are relevant and are included to assess the worth of the project. We shall have to collaborate with Clean World Ltd. for setting up a plastic waste system into place that will collect waste plastic and thus provide input for the recycle procedure. This proposal shall however attract additional costs in administrative and general expenses amounting to $ 2 million for every fiscal year. With financial benefits, it shall attract several non-financial benefits as well. Recycling products shall increase our reputation in the market. This shall allow our customer base to expand. Corporate sustainability is the need of the hour and we try to become a part of it, our corporate image is likely to enhance and shine. Considering all the mentioned facts, we have conducted a critical examination that calculates estimated profits taking into account the time value of money. The discounting rate used is 8% per annum. This option yields us a net present value of $ 63,15,83,078. Since, this proposal tends to benefit us with a positive benefit; this might be accepted on an individual basis. Appendix 1 has been attached below for reference.

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The second proposal would allow us to license our recycling methods to Clean Energy lLtd. This organization seems to show keen enthusiasm and trust on us and our management processes lately. They wish to produce recycled plastic using our established methods and procedures and would sell them exclusively to us without any compromise. This would continue for the next five years as well. This project seem to generate same revenue as the above one but costs shall remain equivalent to that incurred by us had we continue to operate existing business practices without recycling alternatives. Hence, the partner organization would save in energy costs by charging us with same costs. This proposal would also charge us with the supplier's margin at the rate of 10%. Apart from these facts, this proposal shall not require any investment in plant and machinery, thus no maintenance and depreciations charges shall arise to reduce taxable income. It would attract additional costs on grounds of administrative and general expenses amounting to $ 1 million on an annual basis for each of the five years. Other than this, we are not liable to pay any extra charges or expenditures that may arise from the acceptance of this proposition. After critically assessing the financial aspects of the proposition, it is estimated that the project to license the use of such patented recycling methods shall provide us with a net present value of $ 578177877. The discounting rate used in this proposition is 8% per annum. Again if this as the sole option available to us, we could have accepted this one as it seems to generate positive results. Appendix 2 has been attached below for reference.

Considering both the alternatives as mentioned above, it would be better if we accept proposal 1, i.e., adding production lines of recycled plastics to our portfolio. This proposal wpuld give higher prfits in near future taking into consideration all corporate taxes we are attracted to and the time value of money. Although the project may seem financially viable and appealing to us, we should consider other factors that may contribute to its uncertainties. Producing recycled plastic may be time consuming and may affect the quality of the plastic as well. Virgin plastic is first used while recycled ones are used multiple times. Thus, packaging of the product may degrade with the passage of time. It may initially augment our goodwill in the market but with time our clients may get disappointed about our packaging and delivering services. Thus, it is important for us to consider these uncertainties as well before we wish to undertake the given alternative.

We seem to have made our research in undertaking the opportunities available on the two fold principle of aiming towards sustainable development as well as increasing our economic growth. The above alternatives would help us reap many benefits than our existing business practices as our approach is more environmentally focused and works to aim towards corporate sustainability. It is our duty to help sustain the environment by making genuine efforts towards the same. This is concentrated on grounds of corporate social responsibility that is growing with immense popularity and momentum these days. Also, government agencies are in favor of those corporate entities that allow such corporate responsibility to breed in their functions. Environment conversation is another aspect that we seem to look into keeping in mind the amount waste we produce today and in the near future. It shall allow us to maximize how efficiently and effectively we use our resources to establish our brand image.

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