Are You Working As A Financial Advisor For Mr. Buzzi?

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Case: You are working as a financial advisor for Mr. Buzzi, who is a well-known investor. Today Mr. Buzzi has explained to you a new business project that he has, and he wants you to prepare projected financial statements to have an idea of the profitability of the project. Following we have the data that Mr. Buzzi has delivered to you: Sales: The expected sales are 500000 units for the first year, and the sales growth is expected to be 100% for the year 2, 100% for the year 3, 120% for the year 4 and 130% for the year 5. The sales price per unit is 9€ per unit for the first year, and the estimation is that the price would be growing at a 7% every year. Variable production cost: The recipe of the product explains that the cost will be of 6€ per unit on the first and second year, and will be growing at a 2% year after year afterwards. Production labor: The first year the plant needs 6 technicians with a cost of 45,000€ per person per year, 56 production workers with an annual cost of 30,000€ per employee per year, and 1 manager with a cost of 92,000€ per person per year. The next years the production labor will increase, due to the fact that the production of the plant will also be increasing. The year 2 the cost will be 50% higher than year 1, the year 3 the cost will be 50% higher than year 2, the year 4 the cost will be 55% higher than year 3 and in year 5 the cost will be 55% higher than year 4. Investment: the required investment is 13,500,000€, of which 10,000,000€ will be depreciated over a period of 10 years and the rest will be depreciated over a period of 4 years. No more investments will be required during the years 2 until 5. Utilities expense: We expect a cost of 0.20€ per unit on the first year, the expectation for the following years is to have a cost increase of 4% year after year. Maintenance: The maintenance will be outsourced, and we expect a cost of 0.3€ per unit produced year after year. General and administration costs are expected to be 200,000€ for the first year, 210,000€ for the second year, and for the following years the cost should increase in line with the sales volume, having a cost increase of 0.5% of sales of the additional sales. The days to collect accounts receivable are 90, the days to pay suppliers are 30. The company will need an inventory of 45 days. Mr. Buzzi is ready to invest 8,000,000€. The investments need to be paid upfront and the rest of money needed will come from a bank credit line, you should make your own estimation of the amount needed. The tax rate is 25% and the interest rate is 5%. Mr. Buzzi is requesting from you a proposal of Profit & Loss account for the next 5 years and a balance sheet for the same period. A few weeks later, Mr Buzzi asks you to prepare a cash planning for the first year based on the following assumptions. Consider that the raw materials will be purchased on the previous month (starting in December) The raw materials inventory should be based on 45 days of the next month sales. Labor cost (also G&A) is paid divided between 12 months, always at the end of the month. Utilities and maintenance are paid every month depending on the consumption. Income tax is paid on the month of March. Interest expense is paid on the following month. Academic Essay Marking Criteria PART A Criteria Poor standard of literacy surrounding the essay style or layout, or the grammar or the academic referencing using APA style Occasionally refers to the study material and professional academic readings. Refers to data. Description of your stance. Use of middle and lower order thinking throughout. Use of lower and middle order literacy skills throughout. Acceptable standard of literacy surrounding the essay style and or layout, and or the grammar and or the academic referencing using APA style Refers to the study material and professional academic readings. Use of data to make decisions. Thorough analysis of your stance. Use of mainly middle order thinking throughout. Use of mainly middle order literacy skills throughout. High standard of literacy surrounding the essay style, layout, perfect grammar and academic referencing using APA style Analyzes the study material and professional academic readings. Analysis of data to make highly informed decisions. Some deep justifications of your stance. Use of higher and middle order thinking throughout. Use of higher and middle order literacy skills throughout. Extremely high standard of literacy surrounding the essay style, layout, perfect grammar and academic referencing using APA style Thoroughly evaluates the study material and professional academic readings. Detailed Interpretation of data to make highly informed decisions. Deep justifications of your stance. Use of higher order thinking throughout. Use of higher order literacy skills throughout. Content limited understanding of pedagogical approaches, or concepts, or content. Limited understanding Solid understanding of pedagogical approaches, and or concepts, and Solid understanding Deep understanding of pedagogical approaches, concepts, and content. Deep understanding Deep and thorough understanding of pedagogical approaches, concepts, and content. Deep and of content may include design, skills, relevant curriculum documents or resources Limited Solid understanding of Technology Mandatory syllabus. Or resources. Limited strategies for implementing the NESA syllabus and associated curriculum documents. Limited understanding of problem- based learning. Limited understanding of project- based learning. Response to a few of the verbs: state differentiate, evaluate, and justify. of content may include design, skills, relevant curriculum documents and resources. Solid understanding of Technology Mandatory syllabus.

Or resources. Mixed strategies for implementing the NESA syllabus and associated curriculum documents. Solid understanding of problem- based learning. Solid understanding of project- based learning. Response to some of the verbs: state differentiate, evaluate, and justify. of content may include design, skills, relevant curriculum documents and resources. Deep understanding of Technology Mandatory syllabus. Appropriate strategies for implementing the NESA syllabus and associated curriculum documents. Very good understanding of problem- based learning. Very good understanding of project- based learning. Response to most of the verbs: state differentiate, evaluate, and justify. thorough understanding of content may include design, skills, relevant curriculum documents and resources. Deep and thorough understanding of Technology Mandatory syllabus. Highly appropriate strategies for implementing the NESA syllabus and associated curriculum documents. Deep understanding of problem-based learning. Deep understanding of project-based learning. Response to the specific verbs: state differentiate, evaluate, and justify.

Paper For Above instruction

Developing accurate and comprehensive financial statements is essential for assessing the viability and profitability of new business projects, especially when significant investments and financial risks are involved. Mr. Buzzi's project presents a complex scenario requiring detailed projection of income statements, balance sheets, and cash flow statements over a five-year horizon. This analysis aims to evaluate the projected financial performance, considering various variables such as sales growth, costs, investments, financing, and taxation, culminating in informed strategic recommendations.

1. Introduction

Financial planning for new ventures demands meticulous forecasting of revenue streams, cost structures, investment requirements, and financing strategies. Given the dynamic variables in Mr. Buzzi’s project—including fluctuating sales, variable costs, labor requirements, capital investments, and taxation—the task necessitates an integrated approach that combines assumptions with data-driven calculations. The primary goal is to estimate the profitability, liquidity position, and overall financial sustainability of the project during its initial five years, supporting Mr. Buzzi’s investment decision-making.

2. Revenue and Sales Projections

The project forecasts initial annual sales of 500,000 units at €9 per unit, with subsequent years exhibiting compounded growth rates. Year 1 sales revenue amounts to €4,500,000 (500,000 units × €9). The sales volume doubles in Year 2, reaching 1,000,000 units, with a 100% growth rate. Price per unit increases annually by 7%, leading to Year 2 price of €9.63, Year 3 €10.30, Year 4 €11.02, and Year 5 €11.80.

Applying the growth and pricing assumptions, the revenue streams for each year are calculated accordingly, which significantly influence gross profit margins and operational efficiency assessments.

3. Cost Analysis and Profitability

Variable Production Costs

Initially, variable costs are €6 per unit for Years 1 and 2, with a subsequent 2% annual increase from Year 3 onwards. For Year 1, total variable costs amount to €3 million (500,000 units × €6). Growth in production costs impacts gross margins and determines the level of operational leverage achievable.

Labor and Manufacturing Expenses

Labor costs include specialists, technicians, and managers. In Year 1, total labor costs are calculated based on fixed salaries: technicians (€270,000), production workers (€900,000), and managers (€92,000). Adjustments for subsequent years follow the specified percentage increases, considering the incremental labor needs aligned with production expansion.

Additional Operating Expenses

Utilities, outsourced maintenance, and administrative costs are projected based on per-unit expenses, inflation adjustments, and sales correlations. Utility costs start at €0.20 per unit with 4% annual increases, while maintenance remains constant per unit. G&A costs are initially €200,000, with scheduled increases aligned with sales growth.

4. Capital Investment and Depreciation

The total investment of €13.5 million is allocated between depreciation over 10 and 4 years, influencing the annual depreciation expense. The upfront payment necessitates external financing, likely a bank loan, requiring estimation of loan amount based on available equity and investment needs.

5. Working Capital and Cash Flow Components

Working capital needs are computed considering accounts receivable (90 days), accounts payable (30 days), and inventory (45 days). These assumptions impact cash flow timing, liquidity, and the financing structure required to sustain operations.

6. Taxation and Financing Costs

Tax expense at 25% reduces net income, while interest expenses (at 5%) incur monthly payments. The analysis incorporates effective interest calculations and tax effects on cash flow, essential for accurate cash planning and investment appraisal.

7. Financial Statements and Cash Planning

The projected profit and loss statements for five years indicate evolving profitability metrics, with revenues driven by volume and price increases, and costs heavily influenced by inflation and operational scaling. The balance sheets illustrate asset and liability positions, including fixed assets, working capital, and financing arrangements.

Cash flow forecasts for the first year are developed based on detailed monthly inflow and outflow assumptions, ensuring liquidity needs are met and investment returns optimized. These include timing considerations for raw material purchases, labour payments, utility and maintenance costs, taxes, and interest payments.

8. Conclusion

Comprehensive financial modeling provides valuable insights into the project's potential profitability, risks, and funding requirements. Strategic recommendations will then be formulated based on these projections, guiding Mr. Buzzi’s investment decisions to maximize returns and mitigate liquidity risks.

References

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