Cango Financial Analysis in Order

CanGo Financial Analysis

In order to make an informed recommendation, it is necessary to assess the investment project from at least three standpoints -- the cost-benefit analysis, the breakeven analysis and the net present value.

Cost-benefit analysis

The benefits of a new automated storage and retrieval system:

It would decrease overhead costs

It would reduce the workload and the working hours, to generate savings with employee expenses

It would reduce the inventory costs

It would minimize the risks

It would improve product handling

It would reduce the production costs

It would improve the processing times

It would improve the quality of the customer services, all to lead to an enhanced customer experience

The final fiscal value of these benefits is of $35,556,602. All these elements would eventually lead to a superior quality of the products and services offered by the CanGo Company and to a higher level of customer satisfaction. Consequently, the ultimate benefits would be those of increased financial stability and a better consolidated competitive position.

The costs of a new automated storage and retrieval system:

the loss of control and centralization over the business operations the allowing of an external player access to company information the possibility for the external player to use the private company information financial costs of an estimated $8,725,897

From the standpoint of the cost and benefit analysis, the implementation of a new SRS reveals both advantages as well as disadvantages. Yet, the numeric value of the advantages is significantly higher than the numeric value of the disadvantages, meaning as such that the investment is worthwhile.

Breakeven analysis

A breakeven analysis is constructed on the costs of the project and the retail price of the product and it identifies the moment at which the investment would start running a profit. In this particular case, a traditional breakeven analysis is difficult to conduct due to the lack of sufficient information on the costs. Yet, it can still hold value under the following assumptions:

The retail price per unit is of $5

The variable cost per unit is of $2.50

The total fixed costs run up to $7,703,686, and the expected unit sales is of 10,000,000 pieces

The total revenues total up to $50,000,000

The total variable costs run up to $25,000,000

The profit runs up to $17,296,314

Given these assumptions, the breakeven point would be achieved upon the sale of an estimated 3,000,000 items, when the profit turns from a negative value to a positive one. The chart below reveals these conclusions.

Chart created on the Dinky Town website, 2010

A comparison of the financial costs and benefits of the investment -- broken down into 10 years -- reveals that the investment would start running on profits throughout the third year of operations.

Net present value analysis

The net present value is an investment analysis tool which compares the cash flows of the project, discounts them with inflation and identifies the present value of the money which would be generated by the project. In a context of a discount rate of 7% and a life project of ten years, cash flows of a negative $4,148,126 for the first year and then positive $3,441,981 for the remaining nine years, the net present value for the new automated storage and retrieval system is of $9,377,897.27. Additionally, the current value of the project cash flows is of $17,081,476.27, which is higher than the initial cost (Investopedia, 2010). This leads to the conclusion that the implementation of the project is recommendable.

From the analysis of the net present value, it is also possible to assess the project from the standpoint of its internal rate of return. The IRR for the new automated storage and retrieval system is of 83%. In optimal conditions, this figure would be compared against the value of another investment project. Yet, in the absence of an alternative, the high value of the IRR is sufficient to reveal the high capability of the new ASRS to generate positive organizational outcomes.

Given the analyses so far conducted, a conclusion is being formed in that the implementation of a new automated storage and retrieval system is a positive investment project for CanGo. All the internal benefits would eventually materialize in a better consolidated competitive position, making the investment even more worthwhile. Today, CanGo is a competitive organization, whose financial ratios -- such as profitability, liquidity, efficiency or debt ratios -- are similar with industry averages. This virtually means that the new automated storage and retrieval system could represent an opportunity for the company to improve its ratios above the industry average.

Yet, in order to ensure its success, several recommendations are noteworthy:

The contraction of an outside expert specialized in change management and integration

The coaching of the employees to accept and operate under the new system