Background:

Record Master provides off-site record storage, management and retrieval services to hospitals and medical offices. The proposed transaction presented herein covers the four Record Masters locations (hereafter referred to “Business'' or “RML” of Detroit, New Orleans, Philadelphia and Pittsburgh. The first operation began in October 1986 in New Orleans and the most recent began in Detroit in December 1987.

Form and Ownership:

The four locations of the Business are all independently owned corporations and are organized as subchapter corporations in their respective states.The owners of these independent companies are also the respective CEOs. All locations are franchises of Record Masters Corporation, of which they in turn are shareholders and Directors.

Location and Facilities:

The business leases facilities that are strategically located within the metropolitan areas served. Location is critical for RML because Record Masters standard service guarantee promises one-hour ‘'STAT'' (emergency requests) record delivery to any client, 7 days per week, 24 hours per day. Dry warehouses ranging in size from 36,000sq.ft. to 76,000 sq.ft.

Reason for Sale:

The owners feel that there is substantial potential for continued growth and that future profitability and growth can best be realized by and organization that is strategically positioned to facilitate growth and invest in new processes, services and technology to meet the growing needs of their clients.

Personnel:

Location

Managers

Full Time

Part Time

Off-Site

Total

Detroit

3

18

5

13 part time

39

New Orleans

2

39

0

68

109

Philadelphia

11

26

19

0

56

Pittsburgh

4

22

4

0

30

Financial Analysis:

Dec 1993

X

Current Ratio

Current Assets/Current Liabilities

1,641,940/676,019

2.428

The current assets as of balance sheet date are well managed as company (franchises) has more current assets than of current liabilities. This shows the ability to pay off current obligations using current assets.

Dec 1993

%

Return on Capital

Employed

Profit before tax x 100

Total Assets - C/L

1,159,390/1925542

60.21%

Ratio of 60.21% shows franchises ability to earn good profit for every dollar invested. The ratio is significant and give an idea about strong ability of the business to generate above average profits.

Dec 1993

%

Gearing Ratio

Long term Debt x 100

LTD + Equity

95384 / x 100

1,789,318

5%

The ratio explains that comparing to equity amount of debt is very nominal i.e. 5% of the business financing for its assets and the stockholders have provided 95%. This gearing ratio is on a lower side and has no significant affect on the financial position of the business, furthermore business is earning a good amount of EBITA which shows business potential to easily payoff all its obligations.

The shareholders has invested 95% in form of equity (shareholders funds + retained earnings).

Dec 1993

%

Capital Gearing Ratio

Long term Debt x 100

LTD + Equity

95384 / x 100

114916

83%

Capital gearing ratio is on a higher side. It is generally accepted that in the UK the capital gearing should not normally be above 0.5 or 50%.

Dec 1993

X

Interest Cover Ratio

Interest

EBIT

15083/

1166912

77.36X

Ratio of 77.36x shows franchises ability to pay interest as it comes due. The four franchises have great potential to earn profit at a constant growth rate that give them opportunity to get more financing through debt.

Dec 1993

Earning per Share

Net Income

No. of shares

1122216/

19532

57.45

The franchises consolidative have earned $57.45 for each share of outstanding common stock. This shows healthy business position and good investment opportunity.

Dec 1993

Days

Debtors Collection Period

Receivable x 365

Sale

1278267/ x 365

6957758

67days

Based on the nature of business the captioned company is working i.e. record management. The debtors collection period is marginally on a higher side exposing company (franchises) to increasing working capital needs.

Dec 1993

Days

Creditors Payment Period

Creditors x 365

CGS

12652/ x 365

4529758

10days

As compare to debtors collection period of 67 days the creditors payment period is very low of 10 days. This is exposing company (franchises) to increased working capital requirement justified by gearing percentage and accounts payable.

RECORD MASTERS

Requirement # 1.

Assess the minimum price that Dauten should pay for the franchises of Record Masters. Base the price (at least initially) on the forecasts given in the exhibits to the case.

As it can be very expensive and difficult to reverse, when it comes to making potential investment a careful thought is required to every step of action.

If making investment decision is feasible; a detailed investigation of all facets will be undertaken. The proposal should be subject to financial appraisal.

There are several main methods of appraising a project and calculating a value for example:

  1. Net Assets Valuation Model (NAV)
  2. Dividend Valuation Model
  3. Payback method (PV)
  4. Using WACC
  5. Internal rate of return(IRR)
  6. Net present value(NPV)

As per information provided in case study and in lieu with the requirement #1 of course work for initial estimate NAV and Dividend valuation model been use.

Minimum price | value of the company i.e. Record Master (Franchises):

Initial Estimation:

1. Net Assets Value Method:

Non Current Assets + Working Capital = Equity + Debt

I have used above formula to calculate the Net Assets Value hereby be referred
i.e. NAV.

Following information | values are taken from the balance sheet available in case study
pg #23

Non Current Assets = Total Assets - Current Assets

= $2601561 - $1641940

= $959,621

Working Capital = Current Assets - Current Liabilities

= $1,641,940 - $676,019

= $965,921

Non Current Assets + Working Capital = $1,925,542

Less: Debt = $2,601,561

NAV=$1,789,318

Definitely the above referred value will not be the price of the four franchises as balance sheet figures give idea on historic cost and ignore the very important aspect of market reputation |intangible assets. Furthermore balance sheets gives idea of the business on a particular day in the year whereby for calculating the price of the company a detailed analysis of the potential of the growth and other financial figures on a period is necessary to be consider before finalizing the value of a business., secondly due to following reasons:

The Fundamental Weakness:

  • Investors do not normally buy a company for its balance sheet assets, but for the earnings / cash flows that all of its assets can produce in the future.
  • We should vale is what is being purchased, i.e. the future income/cash flows.

Subsidiary Weakness:

The asset approach also ignores non-balance sheet intangible ‘assets' e.g.:

  • Highly-skilled workforce
  • Strong management team
  • Competitive positioning of the company's products (in subject case study the valued record)

Ref: ACCA financial management F9 chap 20.

2. Dividend valuation Method:

Formula: Do (1 + g)

Ke - g

Here:

Do = Dividend Paid this year

g = growth rate

Ke = Cost of Equity

Calculation;

= 510410 (1 + 6%)

11% - 6%

= 541035

5%

=

$10.821m

Amounts taken…

Do = Distribution to stockholders (Cash flow statement pg# 24)

g = based on calculation

Calculation of growth rate;

Value of company (Po) by comparable transaction statistics

P:E rate of Bekins Record Management

EBITDA = $4.0 million

Purchase Price = $42.0 million

P:E = 4.0

42.0

= 10.5

Po = 10.5 x Current year cash flow of Record Masters

= 10.5 x 1,142,390

Po = $11,995,095 or $11.995m

11,995,095 = 510410(1 + g)

11% - g

g = 6.39% or 6%

Ke = 11% (Ref: Canada Bank research)

(Ref: Bank Canada Review, Autumn 2007. Lorie Zorn, Financial Markets Departments)

Do = 510410 (pg # 24)

Putting in the values in formula:

11,995,095 = 510410 (1 + g)

11% - g

G = 6.39% or 6%

Weakness of the DVM:

  • It assumes that growth will be constant in the future this is not true of most companies.

  • The current rate of dividend growth is different from that of OA;

  • Could well change following the acquisition.

  • The model is highly sensitive to changes in its assumptions.

  • John Allday, head of valuation at Ernst & Young, says that:

    “Discounted cash flow is the purest way; I would prefer to adopt it if the information is there”.

    To get a more realistic and acceptable price | value of the company i.e. Record Master four franchises income earning method is been used as following:

    Using WACC:

    Formula:

    Cash flow (CF 1)

    WACC

    For calculating I have divided my calculations in two parts;

    i) Cash Flow

    ii) Calculating WACC

    i)Calculation of Cash Flow:

    1. Increase in Working Capital

    Accounts Receivables

  • Receivable x 365 1278267 x 365

    Sale 6957758

    = 67days

    Assuming revenue will increase in lieu with compound growth rate i.e. 49%.

  • Account Receivable (1994)

    Revenue (1993) x 1.49

    = 6957758 x 1.49 = 10367059

    Assuming 90% of sales are on credit basis.

  • Increase in Account receivable:

    = Revenue (1994) x 90%

    = 9330353

    = 9330353 x 67

    365

    = 1712695

    = 1712695 - 1278567

    = 434428

    Accounts Payable

    = Creditors x 365

    CGS

    = 126502 x 365

    4529758

    = 10

    Assuming cost of sale will increase in lieu with compound growth rate i.e. 49% of revenues.

  • = cost of sale x 1.49

    = 4529758 x 1.49 = 6749339

  • Assuming 90% of cost of sale is on credit basis.

    60749339 x 90%

    = 6074405

    Increase in Accounts Payable:

    = 6074405 x 10

    365

    = 166422

    = 166422 - 126502

    = 39920

    Increase in Fixed Assets:

    = Turnover

    Fixed Assets

    = 6957758

    959421

    = 7.25 times

    = 6957758 x 1.49

    = 10367059

    = 10367059

    7.25

    = 1429939

    = 1429939 - 959421

    = 470518

    Tax:

    = EBITA (93) X 1.49

    = 1535016 X 1.49

    = 2287174 @ 3.2%

    = 73190

    Depreciation;

    Year (93) = 146800 + 221304

    = 368104

    Accumulated Depreciation = Dep (Previous Year) + Dep (current year)

    Fixed Assets at the start of (93) = Net F/A + Dep of current year

    = 959421 + 368104

    = 1327525

    Depreciation rate = 368104 x 100

    1327525

    = 28%

    Depreciation (1994) = 959421 + 470518

    = 1429939 x 28%

    = 400383

    Interest Payment:

    EBITA (93) X 1.49 = 1535016 X 1.49

    = 2287174 (EBITA 94)

    = 2287174 X 8%

    = 182974

    Cash Flow (CF 1):

    Particulars

    Amount in $

    Profit Before Interest & Tax

    2,287,174

    Depreciation and amortization

    400383

    Less: 2,687,557

    Capital Expenditure

    470518

    Increase in Account Receivable

    434428

    Tax

    73190

    Interest

    182974

    Add:

    Increase in Accounts Payable

    39920

    Net cash provided by operating activities

    1566367

    Adjustment

    Royalty

    9000

    1% of sale

    103671

    Free Cash Flow

    1453696

    ii) Calculation of WACC:

  • Interest % = 15083 x 100

    194794

    = 8%

  • Corporation Tax rate % = 40% (ref: KPMG research)

    (ref: KPMG's Corporate Tax Rate Survey from 1993 to 2006)

    Cost of Equity:

    = 11% ( ref: Canada Bank research)

    (Ref: Bank Canada Review, Autumn 2007. Lorie Zorn, Financial Markets Departments)

    Cost of Debt:

    = Interest rate (1 - Tax%)

    0.08 (1- 40%)

    = 4.80% or 5%

    Value

    Proportion

    Cost

    WACC%

    Equity

    1,789,318

    0.95

    11%

    10.45

    Debt

    95,384

    0.05

    5%

    0.25

    Total

    1,884,702

    1.00

    16%

    10.70

    Value of the company

    = Cash Flow 1

    WACC

    = 1453696

    10.70

    =

    $13,585,943

    Or

    Value of the Company (Franchises)=

    $ 13.586m

    Cross check comparison:

    Owners Earning Method:

    = Cash flow @ growth rate

    Ke - g

    = 1,142,390 @ 3% growth rate*

  • after adjusting inflation factor

    = 1176662

    = 1176662

    11% - 3%

    Value of Record Masters (Franchises) = $14708275 or $14.708m

    Investment appraisal Projected cash flow statement

    Year

    0

    1

    2

    3

    4

    5

    DESCRIPTION

    Cash Inflow

    Owner Equity

    13.586M

    Project Loan

    *Total cash inflow@49% (g)

    -

    1,566,366

    2,333,885

    3,477,489

    5,181,459

    7,720,374

    Cash Outflow

    Capital Expenditure

    -

    -

    -

    -

    -

    Add:Royalty 750p/m

    -

    9000

    9000

    9000

    9000

    9000

    Less: 1% of Sales

    -

    103670

    154469

    230159

    342937

    510976

    Total Cash Outflow

    -

    163469

    239159

    351937

    519976

    Net Free Cash Flow

    -

    1,453,696

    2,170,416

    3,238,330

    4,829,522

    7,200,398

    Cumulative

    1,453,696

    3,624,112

    6,862,442

    11,691,964

    18,892,362

    1. Net Present Value:

    YEAR

    CASH FLOWS

    PVIF @ 35%

    PRESENT VALUE

    1

    1,453,696

    0.7407

    1.077

    2

    3,624,112

    0.5487

    1.989

    3

    6,862,442

    0.4064

    2.789

    4

    11,691,964

    0.3010

    3.519

    5

    18,892,362

    0.2230

    4.213

    Present Value Of Cash Flows

    $13.587m

    NPV= PV - I

    NPV=13.587 - 13.586

    NPV= 0.001

    Investment opportunity should be accepted.

    2. BENEFIT COST RATIO:

    =

    Present value of cash inflow

    Net investment

    =

    13.587

    12.906

    = 1

    .053

    EACH DOLLAR INVESTSD WILL EARN Rs 1.053

    3. Project payback period

    Equity & cash flow

    Equity

    (13,587,000)

    Year 1

    1,453,696

    (12133304)

    1

    Year 2

    3,624,112

    (8509192)

    1

    Year 3

    6,862,442

    (1646750)

    1

    Year 4

    1646750

    0.14

    Year 5

    8684419

    3.14 years

    4. Internal Rate of Return (IRR)

    A = 18892362 (cumulative cash flow) = 3778472

    5

    PVIFi, 5 = 12,906,000 (equity part to be invested i.e. 60%) = 3.41

    3778472

    27% 34/28%

    3.30 2.266/3.43

    As inflow is increasing so we move backward direction.

    YEAR

    CASH FLOW

    PVIF @ 28%

    PRESENT VALUE

    1

    1,453,696

    0.781

    1,135,336

    2

    3,624,112

    0.610

    2,210,708

    3

    6,862,442

    0.477

    3,273,385

    4

    11,691,964

    0.372

    4,349,411

    5

    18,892,362

    0.291

    5,497,677

    Present Value Of Cash Flows

    16,466,517

    NPV1 =

    16,466,517- 13,587,000

    = 2879517

    YEAR

    CASH FLOW

    PVIF @ 27%

    PRESENT VALUE

    1

    1,453,696

    0.787

    1144058

    2

    3,624,112

    0.620

    2246949

    3

    6,862,442

    0.488

    3348871

    4

    11,691,964

    0.384

    4489714

    5

    18,892,362

    0.303

    5724386

    Present Value Of Cash Flows

    16,953,978

    NPV2 =

    16,953,978- 13,587,000

    = 3366978

    IRR = R1 + (R2 - R1) NPV1

    NPV1 - NPV2

    = 27% + (38%- 27%) 2879517

    2879517- 3366978

    = 27% + 2879517

    487461

    = 27%+ 5.907

    =

    32.90%

    OR

    = 33%

    RECORD MASTERS

    Requirement # 2.

    How should the acquisition be financed? Recommend the amount and type of financing required, and provide a full justification for recommendation.

    The Need of Finance:

    Firms need funds to:

    1. provide working capital
    2. invest in no-current assets

    The main source of funds available is retained earnings, but as per consolidated balance sheet position amount of retained earning is unlikely to be sufficient to fiancé all business needs.

    Choosing between sources of equity:

    When choosing between sources of finance, consideration must be taken of factors such as:

    • The accessibility of finance
    • The amount of finance
    • Costs of the issue procedure
    • Pricing of the issue
    • Control

    Financial Structure:

    Dec 1993

    %

    Debt Gearing Ratio

    Long term Debt x 100

    LTD + Equity

    95384/ x 100

    1884702

    5%

    Dec 1993

    %

    Equity Gearing Ratio

    Equity x 100

    LTD + Equity

    1789318/ x 100

    1884702

    95%

    The ratio explains that creditors have provided 5% of the business (franchises) financing for its assets and the stockholders have provided 95%. This gearing ratio is on a lower side that does not expose business to market risk on the same time have increased variability of returns to shareholders.

    Franchises financial structure is appended below:

    Consolidated Balance sheet position as on December 31, 1993

    Franchises

    Equity

    Debt

    Detroit

    35%

    -

    New Orleans

    28%

    -

    Philadelphia

    35%

    32%

    Pitsburgh

    02%

    67%

    Overall Gearing

    95%

    5%

    Before selecting any source of finance consideration of following factors is crucial:

    A vast range of funding alternatives is open, before examining various sources of finance available, following factors needs consideration before reaching to some decision.

    Cost

    Duration

    - The higher the cost of funding, the lower the firm's profit.

    - Debt finance tends to be cheaper.

    - Interest on debt finance is normally corporation tax deductible.

    - Return on equity are not corporation tax deductible.

    - Finance can be arranged for various time periods.

    - Long term assets should be financed by long-term funds and ;

    - Short term assets by short-term funds.

    Gearing

    Accessibility

    -Bring the risk to meet regular repayments of interest and principal on the loans.

    - If these are not met the company could end up in liquidation.

    - Too little debt could result in earnings dilution.

    -For Pvt ltd. companies there is limitation in choices for raising finance.

    -Options for raising fincance can be Banks, Venture capital funds, Business angels and Financing houses.

    Note:

    As per acquisition criteria, Dauten wants to invest | sponsor buyout in which he would provide the majority of equity capital and would play a more active management role (ref: pg. # 1) and on the same time keep the same financial structure (ref: pg. # 4). Further as cost of debt of 5% after taking tax rate adjustment is less than cost of equity i.e. 11%. This makes raising debt option more viable to increase earnings resulting in greater EPS.

    Sources of Finance:

    The suitable sources of finance for the acquisition price are as under:

    Sources of Finance

    Equity

    Debt

    95%

    5%

    12.906

    0.679

    DISTRIBUTION OF LOAN AND EQUITY ON CAPITAL AND WORKING CAPITAL

    Description

    %

    Amount $

    Amount $

    Capital

    Equity

    95%

    12.456m

    Debt

    5%

    0.655m

    13.111m

    *Working Capital

    Equity

    95%

    0.450m

    Debt

    5%

    0.024m

    0.475m

    Total Working Capital

    Total Investment

    13.586m

    *Note:

    As balance sheet position of more then one year is not given, comparison of increase in working capital requirement is assume on the basis of increase in account receivable ($434428) and account payables ($39920) making total woring capital requirement for 1994 $474348.

    PROJECT FINANCING

    Description

    Local

    Foreign

    Total

    Equity

    DAUTEN

    12.906

    0

    12.906

    Total Equity

    12.906

    0

    12.906

    Loan

    0

    Long term Loan

    0.655

    0

    0.655

    Working Capital Requirement

    0.024

    0

    0.024

    Total Debt

    0.679

    0

    0.679

    Total Investment

    13.586

    0

    $13.586m

    Modus operandi for acquisition transaction:

    For acquisition transaction $12.906m will be injucted in form of equity by way of taking over equity from original stakeholders | owners. Out of total equity amount $0.450m (95%) will be used in working capital to meet day to day requirement rest will be used in equity in shape of capital investment.

    Advantages of Equity Investment:

    • As owner of the four franchises, have the right to exercise control over the acquired franchises.
    • Right of vote to determine crucial matters.
    • Right to approve | disapprove of major strategic
    • Right to receive dividend.

    Amount of $12.208m will be put in by debt (long term & short term) as under:

    Debt Options:

    Taking over a company (franchises) that is private ltd. in structure. For raising debt Dauten has following options:

    1. Retail Banks

    I. Bank Loans

    II. Lines of Credit

    III. Revolving Loans

    2. International Banks

    3. Finance Houses

    4. Money Market

    5. Bonds

    Advantages of Debt Investment:

    1. Interest is tax deductible
    2. Tax relief reduces finance cost.
    3. Is low risk.
    4. Cheap compare to equity
    5. Has predictable flows
    6. Does not dilute control
    7. As compare to cost of equity i.e. 11%, cost of debt is low i.e. 5%

    Considering the growth rate in sales volume and EBITA raising debt will not have a significant effect on the financial position. Furthermore debt (short | long) has a definite maturity and the amount of obligation is fixed so the lender gets the same interest whatever the earnings of the company is.

    This induction of debt will raise capital structure of the company at the same time the WACC rate will also surged down that will increase the value of the business. Furthermore the by adding debt proportion in financial structure of the business consequently result in high return to shareholder's on their investment, that is what Dauten expects i.e. internal rate of return on investment i.e. 35%.

    RECORD MASTERS

    Requirement # 3.

    What strategies could Dauten adopt to increase the value of the business?

    Strategy # 1:Improving the company's Financial Performance

    One of the statutory that Dauten can focus on for increasing the value of the business is for improving the business financial position that the business is good and profitable. There are some red flags in the financial especially in the current assets containing account receivable amount that is on a higher side with collection days near to 35 days. Dauten have to introduce new strategies regarding sales collection to reduce this collection period, sales are not very good if we compare the figures with other company in the industry i.e. Bell + Howell Records Management amounting $95m. EBIT of the company is lower than the total assets, equity is very low as compare to debt. Ploughing back the profit into equity as retained earning can help to strengthen the equity poison.

    To improve the business financial position, Dauten should maintain the current assets of the business to a certain level and reduced the current liabilities of the business because the current liabilities carry charge on current assets. Looking to the capital strucurte with debt weightage of 83% maintainance of assets (quick assets) is crucial to carry on lenders / creditors trust going on, this can also help to improve current ratio and Quick Ratio. Sales figures are high compare to fixed assets and total assets, as per Record Masters management planning i.e. technology innovation. Dauten should invest more in fixed assets. Dauten also need to improve EBIT to enhance profit ratio and to improve Time interest earned ratio and also improve EBITDA ratio.

    The assets of the company is not very large and the profit of the company is good as compared to assets and equity of the business. If we improve Return on assets, return on equity and basic earning power ratio. Dauten must improve profit to meet the level of the business and also achieve the benchmark of the company.

    Strategy # 2: Raising debt portion in capital structure

    Dauten can further improve the market value of the business by raising more debt portion in capital structure to offer more benefit to the share holder of the business. By increasing debt portion in capital structure that surge-down the WACC of the business the value will increase ultimately benefiting the shareholder due to the characteristics debt financing brings with it (already discussed above in detail).

    This is further explained below:

    Equity : 80% Debt : 20%

    than WACC:

    Value

    Proportion

    Cost

    WACC%

    Equity

    1.789

    0.70

    11%

    7.7

    Debt

    0.766

    0.30

    5%

    1.5

    Total

    2.555

    1.00

    9.20

    Value of the company = cash flow

    WACC

    = 1.454

    9.20

    = $15.804m

    Strategy # 3:

    Marketing Plan

    To increase the value of the business adoption of solid, well structured and goal oriented marketing gameplan is essential.

    Following are the Marketing plans that can be applied in business to further increase its value (ultimate goal).

    1. Focussed marketing to high-potential prior relationships.
    2. Broader screening of referral sources to cultivate new relationships.
    3. High degree of service = personal selling, super responsiveness, periodic communications, unique gifts and memorable / fun dialogue.
    4. Origination efforts through direct company contracts and trade shows.
    5. Development of five (5) target industries.
    6. Developing more distribution channels providing an opportunity to market additional products and services to the institutions i.e. hospitals.
    7. Enriching staff with necessary job training as under:
      1. Training Program
      2. Evaluate Training
      3. Job Rotation
      4. Talent Identification and Management
      5. Job Enrichment Techniques
    8. Introduction of new technology and atomisation (Record Masters vision) to en-cash the available opportunity in record management industry and to increase clientele volume.

    RECORD MASTERS

    Requirement # 4

    Suggest how the local owners incentives can be aligned with the goals of Dauten.

    Dauten's Goals:

    1. Achieve unique levels of profitability (01% of 15+%) through high degree of acquisition selectivity, aggressive profit improvement programs, and meaningful management incentives.
    2. Achieve $25 - $50 million in revenues within five years by closing one core acquisition in the next year.
    3. Control own destiny by growing at a deliberate pace, maintaining voting control, employing conservative financial structure, and having dependable operating management in place.
    4. Have fun working with a more concentrated group of referral sources, managers, suppliers, and customers.
    5. Build wealth over a long-term time frame through price discipline, reinvestments, growth, debt, paydown, pre-tax compounding of value and QSBS tax treatment.

    In present structure of the business the management are the local owners of the frenchises performing as CEO | Directors enjoying the voting right, control and decision making.

    Share options give the executive the incentive to manage the firm in such a way that share prices increase, therefore share options are believed to aligned the managers' goal with those of shareholders (Dauten).

    Considering the fact, each management local owner has a distinct advantage based on his / her past experience. After acquisition Dauten should retain the management on the senior positions to attract and motivate them to successfully retain them.

    This may be determined in number of ways, Basic Pay the wages and salary that forms the base of pay should be emphasized and incentives to be provided by way of increasing pay scale in order to motivate the local owners.

    Furthermore, A short term or per annum bonus may be paid to the directors | local owners each accounting year. This can be based on number of accounting measures whichever suit the most to the company nature and environment.

    Economic value added (EVA), this is the surplus calculated above a charge on all assets used using the WACC as a threshold percentage minimum return before a bonuses is achieved.

    Pension funds / policy in addition to increase in basic pay can be a good tool to attract and motivate the local owners.

    In lieu of Dauten's goal to provide a professional and friendly environment, job training and evaluation is necessary part of strategy for the contribution to the company future growth.

    Recommendation / Conclusion:

    DECISION OF THE INVESTMENT

    After making this feasibility analysis now we make decision either this investment should be undertaken or not. So we make decision on the following basis:

    PAYBACK ANALYSIS:

    The payback period calculated is 3.14 years , shows that the investment of $13,586,000made in the project will be returned to the owner in 3.14 years. So on these bases we decide that the project should be undertaken.

    NPV ANALYSIS:

    The NPV of Cash Inflow calculated at an annual rate of 35% for 1st five years is positive i.e. $13.587M. So the investment made in the Project will be feasible.

    BENEFIT COST RATIO:

    The benefit cost ratio calculated is $1.053 . It shows that each dollar invested in the business (RML) will return $1.053.

    IRR ANALYSIS:

    The IRR calculated on the annual rates of 29% and 30% is 29.86%. The IRR is Greater than the cost of Capital. So it is recommended that the investment should be made in the project.

    SO IN THE LIGHT OF ABOVE ANALYSIS IT IS RECOMMENDED THAT THE PROJECT IS FEASIBLE AND SHOULD BE UNDERTAKEN BY DAUTEN AS AN INVESTMENT OPPURTUNITY.

    Source: Essay UK - http://turkiyegoz.com/free-essays/finance/what-is-corporate-finance.php


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