A division of Valles Global Industries (VGI) produces and sells a special type o

Question

A division of Valles Global Industries (VGI) produces and sells a special type of organic machine oil sold by the ounce. For many years, they have sold in Asia through a Seoul-based importer by the name of Park Enterprises. Their contract with Park Enterprises is up for renewal and VGI has decided to look at options. You are in charge of making a recommendation.
  
Option 1: Continue to sell through Park Enterprises. Let them handle everything.   VGI receives a net payment of $5 USD per ounce.

Option 2: Sell a license for production to SohnCo Importers of Seoul, Korea. They will also manage marketing and distribution of the oil. SohnCo Importers will charge VGI a fixed fee of $2 million USD per year to cover marketing costs. SohnCo will pay VGI $10 USD per ounce of VGI products it sells in Asia.

Option 3: Create a new enterprise, VGI Asia, by building a small plant for $10 million USD. Annual fixed costs are estimated to be $1.5 million USD and variable costs are $0.60 per ounce. Gross revenue per ounce is $30.

USD—United States Dollar

Develop a five-year forecast for each of the three options. Assume there is no inflation and do a pre-tax analysis.   Develop a cash flow forecast assuming sales remain variable at somewhere between 700,000 ounces and 950,000 ounces. Make and support a recommendation as to which of the options to employ.

For the tutor: I would prefer seeing how to do it in excel, it's the program we use in class and will fit best with my learning style. Thanks in advance!

Explanation / Answer

Assume sales to be

Year 1 => 700000, Year 2 => 775000, Year 3 => 850000 , Year 4 => 900000 , Year 5 => 950000

Dsicounting Factor @10 % => Year 1 => 0.909, Year 2 => 0.8296, Year 3 => 0.751, Year 4 => 0.683, Year 5 => 0.621

Option 1

Total Present Value => $ 15597250

Option 2

Total Present value => $23614500

Option 3

Total Presnt Value => $77281539

Option 3 should be accepted, as its net cash flow is highest among all the 3 options, so its benefcial to go for option 3 ANd even present value of option 3 is highest.

Particulars Year1 year 2 year 3 year 4 year 5 Net Cash Flow $3500000 $3875000 $4250000 $4500000 $4750000 Discounting Factor 0.909 0.826 0.751 0.683 0.621 Present Values 3181500 3200750 3191750 3073500 2949750

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.