Challenges and Risks in Business Expansion - Essay Sample

Recommendation of Business Expansion

Business expansion is an important aspect of growth and increases the organization's sources of capital. Venturing into new products diversifies the products offered and the marketability of the organization. However, establishing market competitiveness and profitability of the business should be a main point of concern in identifying the business's conduciveness based on its market coverage. The business also needs to establish the viability of the investment plan to the expected profit margin. The organization can venture into a more aggressive business opportunity that deals with fast-moving products based on business opportunities. Therefore, the food industry is a viable business investment bearing in mind that losses can be mitigated by focusing on consumer behavior and food supply patterns. Dealing in staple food also gives the business a competitive edge as the business will require slight promotional offers to reach its target market. However, the financial implication of the projects will be much higher for the business. Based on the expected 12% return on investment, the business will likely not perform to its expectations with the long-term depreciation rate resulting in massive losses. The financial implication of the projects and can lead to cumulative losses over the stipulated 10-year span. The company wants to introduce two projects simultaneously, which will strain its financial position in the short run. The investment plan is also ill-timed, with the business reporting losses in the previous years.

Analysis of Financial Information

The company plans to introduce two different food products in the market for the next ten years. Based on the financial projections on ZXY Company, the company cannot afford to implement the expansion program. The company's financial statements indicate that it has consistently made losses over the last years. The ZXY needs a 12% return on investment with an investment of $7,000,000. In this case, the business expects to make an $840000 return, 12% of $7000000. However, based on the financial statements, the business does not illustrate any potential to attain the expected return with their current financial position. On 10-year financial statements, the business cannot meet 12% of profits from their investments. On the other hand, the $1000000 estimated value on the assets over the next ten years is not guaranteed based on the Modified Accelerated Cost Recovery formula used to calculate depreciation. The formula highlights a $ 134225 depreciation value on the investment value over three years. However, it is evident that with these depreciation values, the business cannot make and profits from its investment.

Risks Evaluation

As highlighted in the case study, at year 1, the business will make losses worth $73357, which will rise to 321680 and 992727 at years 2 and 3, respectively. Therefore, the risk of expanding into the other two new products is exposed. New business investments are expected to benefit the business and increase the return on investment. However, the financial statements indicate that the business cannot make any profits in the three-year depreciation plan based on the MACR depreciation formula. On the contrary, the business will incur persistently increasing losses that do not promote new business ideas. Additionally, the business will take a relatively long period to break even in the second and third years. That implies that the break-even of the business's new financial projections will occur in the fourth fiscal year, which is contrary to business expectations (Deossa et al., 2017).

Straight Line Depreciation and Modified Accelerated Cost Recovery System (MACRS)

The evaluation of depreciation based on straight line methods yields a different account of the business' return on investment. The straight-line depreciation evaluation method determines the changes in charges in an even distribution across the lifetime of a fixed asset. Therefore, based on the business anticipation of selling the assets and equipment at $1000000, the straight-line depreciation approach evaluates the depreciation on an even margin along the 10-year working period. However, the approach is only suitable in the absence of reliable estimates that can define the economic benefits expected to be evenly distributed over the stipulated time (Bennett & Ward, 2010). Similarly, the straight-line method is used in the absence of reliable estimates of the patterns of economic benefits expected to be derived from the assets' lifetime.

On the contrary, MACRS, which is used to calculate depreciation in the case of ZXY company, is a depreciation evaluation approach that integrates tax deductions in the asset's valuation over its lifetime. The approach provides businesses with a recovery of the cost of certain assets that incur deterioration over a certain period (Bennett & Ward, 2010). Besides, the approach provides a quick depreciation over the initial years of the assets' lifetime, but the process can be slowed later. The MACRS depreciation calculation process is beneficial when taxation is implemented on the assets over the years (Bennett & Ward, 2010). The difference in using the two approaches is defined in the calculation of depreciation over the years. MACRS highlights a decrease in the depreciation as the end of the lease approaches. Simultaneously, a straight line is used to assess disposable assets' depreciation at the end of their useful timeline (Bennett & Ward, 2010). In this case, by evaluating the net income of the ZXY company, it is evident that it faces an even decrease from the beginning of the business to the end.

Recommendation

The course of action needs to be evaluated based on business performance and long-run goals. ZXY has the target of establishing new business structures, which calls for crucial decision-making concerning its business investment opportunities. The business faces the challenge of viability in the food products business. The anticipated cost of operation and return on investment are unproportioned to the business's long-term financial goals in the 10-year run. The challenge to ZXY's operational viability can be mitigated by reviewing the organization's human resource needs, researching competitiveness, and reviewing the plant utilities and supplies. The human resource management department is vital for the success of the business. A review of the workforce and the human resource requirements provides an insight into the organization's needs and maximization of output (Deossa et al., 2017). Market research can evaluate the potential competition and market segments where the business can venture in to maximize annual profits (Deossa et al., 2017). The expansion of the business will require new plant utilities and supplies. However, the new acquisitions should fall within the organization's budgetary plans and enhance profitability.

Therefore, ZXY should not proceed with the business expansion plan due to its previous losses and the anticipated lack of return on investment in the 10-year timeline. The business needs to align its operations to the prevailing market structures, recover from the losses, and establish the framework for attaining a 12% net profit. The organization's suitability and performance orientation based on the company's financial statements are limited to streamlining the operations and the profitability of the business. Therefore, venturing into new business opportunities amid the low performance and productivity limits ZXY's long-term performance and targeted profits. The business's financial position and the business's credibility to manage the business expansion projects limit its performance and pose a risk of losses rather than the anticipated 12% return on investment. The best decision is to deny the business expansion plan and reestablish its competitiveness in the market.

References

Bennett, J. A., & Ward, R. (2010). Depreciation: class life*. Rural Tax Education (RuralTax. org)-RTE/2010-16. Utah State University Extension, Logan.

Deossa, P., De Vos, K., Deconinck, G., & Espinosa, J. (2017). Generation expansion models including technical constraints and demand uncertainty. Journal of Applied Mathematics, 2017.