You are the Director of Accounting & Controls for Company XYZ and your boss the

Question

You are the Director of Accounting & Controls for Company XYZ and your boss the VP/Controller has asked you to review a pending transaction that has two potential targets. Your company is trying to decide which target is a better fit both financially and culturally. Below, you will find the facts of the case and the question that needs to be addressed.

Section I - Financials & Metrics as of 12/31/XX

In $000's                                                                                 Target A Target B

Sales                                                                                        $535,500 $698,000$

COS                                                                                        $485,700 $489,000$

Margin                                                                                     $49,800$ $209,000$

SG&A                                                                                     $30,000$ $15,000$

EBIT                                                                                       $19,800$ 4194,000$

Weight Average Cost of Capital                                            10%      10%

Net Present Value - Discounted Cash Flow                           $225,000 $434,000$

Payback Period                                                                       10 years 8 years

Collection Days                                                                      45 days 30 days

Inventory Turnover                                                                 12          4

Working Capital Turnover                                                      8.5         5

Cash                                                                                  $50,000 $150,000

Accounts Receivable, net                                             $100,000 $120,000

Debt                                                                                 $10,000 $100,000

Equity $100,000 $ 50,000

Section II - Due Diligence Findings

Financial Control Environment                                       Excellent      Poor

Pending Legal Issues (likelihood >50%)             Properly Accrued Under Accrued

Environmental Issues                                     Properly Accrued      Lack of Documentation

HR Involvement & Responsiveness                         Poor                Average

Operational Environment                                          Poor               Excellent

Business Practices & Ethics                                      Poor               Average

Which target would you recommend and why?

Please explain thoroughly.

Explanation / Answer

target B is more likely to choose by anyone because of the following reasons

NPV is more than target A: for any project to start it is very important to have positive NPV in this case both the targets having positive NPV so it is better to choose the target which have more NPV

another reason is Pay Back period as it is always better to cover the initial investment of any project as early as possilbe and in this case target B has less pay back period

project B having some issues with financial control which can be solved again same legal and environmental issues also can be solve so it is better to start a project B

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