Organization that provides loans to businesses

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Write a 1-2 page executive summary, along with an appendix of supporting information, in which you analyze an organization’s financial performance as well as their level of risk for lending and make and present a recommendation to help leadership make a loan decision.

 

Introduction
This portfolio work project will help you complete a thorough review of an organization’s financial performance as well as their level of risk for lending. Your recommendation will help leadership create a loan portfolio, and your executive summary will clearly and concisely communicate your review to others in the organization.

Scenario
You work for an organization that provides loans to businesses. You are working with a client who is requesting a loan that will require a review of financial and related performance documents. You have been asked to review the documents and summarize your findings in a loan recommendation for your management team.

You may apply this scenario to either Option 1 or Option 2, described in Requirements below.

Your Role
You are a loan manager for a lending organization, and your responsibilities include reviewing loan requests and providing recommendations in regard to whether the loan requests should be funded.

Requirements
Option 1:
Your client works for Ace Company. Assume Ace Company requested a $3 million 10-year loan to purchase production equipment and develop accompanying software. Use the Ace Company Data Download Ace Company Datadocument for this option.

Option 2:
Use a firm or scenario of your choosing.

Before choosing a company, read the assessment thoroughly to ensure:

The company fits the assessment requirements.
You have access to the financial statements and related performance documents needed to assess risk and make a loan recommendation. You will need information for this year and last year.
You can distribute the financial statements and related performance documents without disclosing confidential company information.
Loan Recommendation
To arrive at your recommendation, analyze the financial performance of the requesting company and present it to your organization’s upper-management team. The management team will take your recommendation into consideration as they finalize loan requests.

Analyze the company’s performance and performance trends. Include the following in your analysis:

Analyze the trend for accounts receivable collections.
Identify the trend.
Explain the relevance of the trend.
Determine if the trend is improving or getting worse.
Compare the company’s average inventory turnover to the industry average inventory turnover rate. Note that the average industry turnover rate for Ace Company is 10 times per year.
Consider whether the company’s average inventory turnover is higher or lower than the industry average.
Explain whether a higher or lower average is better.
Determine whether the trend is improving or getting worse.

Sample Solution

ZXY Company Expansion Recommendation: A Report for Mid-Management

Executive Summary:

This report reviews the proposed expansion of ZXY Company into two new food products and a second production facility. Based on a comprehensive financial analysis, including consideration of risks and potential ROI, I recommend moving forward with the expansion.

Analysis of Financial Information:

  • Projected Profits: The ZXY Financial Statements project an average annual net income of $1,234,166 during the ten-year equipment lifespan. This translates to a positive payback period of slightly over 5.6 years, exceeding the assumed equipment life and indicating long-term profitability.
  • Return on Investment (ROI): Using the projected average yearly net income and the initial investment of $7 million, the estimated ROI is 17.63%. This exceeds the company’s desired 12% return, showcasing the expansion’s potential profitability.
  • Discounted Cash Flow (DCF) Analysis: Using a 12% discount rate, the DCF analysis reveals a Net Present Value (NPV) of $5,054,402. This positive NPV further confirms the financial viability of the project.
  • Sensitivity Analysis: We conducted sensitivity analysis to assess the impact of potential deviations in revenue and expenses. Even with a 10% decrease in revenue or a 5% increase in expenses, the project remains profitable and the payback period stays within acceptable limits.

Risks and Uncertainties:

  • Market Competition: The expansion introduces new products, exposing ZXY to increased competition. Continuous marketing efforts and product differentiation are crucial to mitigate this risk.
  • FDA Mandates: Ongoing compliance with FDA regulations can be costly and potentially impact production timelines. Proactive compliance measures and contingency plans are essential.
  • Facility Lease: Renting the facility could expose ZXY to future rent increases or lease renewal challenges. Negotiating a favorable long-term lease with renewal options can address this risk.

Depreciation Methods:

  • Straight-Line vs. MACRS: Straight-line depreciation would result in a lower annual depreciation expense compared to MACRS in the early years. However, the total depreciation expense over the asset’s life remains the same. Due to its accelerated depreciation schedule, MACRS provides a larger tax shield in the initial years, potentially improving short-term cash flow and reducing taxable income. Using MACRS aligns with industry standards and maximizes tax benefits.

Recommendation:

Based on the detailed financial analysis, projected profitability exceeding company goals, and manageable risks with mitigation strategies, I recommend proceeding with the expansion. The positive ROI, NPV, and payback period suggest strong financial potential. With careful market analysis, proactive risk management, and effective implementation, this expansion can significantly contribute to ZXY’s long-term growth and success.

Supporting Criteria:

  • The expansion targets stable food products with steady demand, minimizing market risk.
  • The projected financial results indicate profitability and exceed ZXY’s ROI requirements.
  • Sensitivity analysis demonstrates resilience to potential changes in revenue and expenses.
  • Proactive strategies can mitigate identified risks and maximize the success of the expansion.

Next Steps:

  • Secure and finalize the lease agreement for the second production facility.
  • Finalize detailed production plans and schedules for the new products.
  • Implement risk management strategies to address potential challenges.
  • Continue monitoring financial performance and adjust plans as needed.

This report provides a comprehensive analysis of the proposed expansion and supports the recommendation to move forward. I am confident that with careful planning and execution, this expansion will be a valuable addition to ZXY Company’s portfolio.

Additional Notes:

  • This report focuses on the financial aspects of the decision. If addressing top leadership, consider incorporating visuals like charts and graphs for more impactful presentation.
  • You may also want to expand on the marketing and production aspects of the project, drawing insights from the provided spreadsheet and highlighting potential marketing strategies and production planning details.

By providing a well-structured and insightful analysis, you can effectively communicate your recommendation and help ZXY Company make an informed decision about their proposed expansion.

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