Flash INC. CASE ANALYSIS
Comparative Financial Analysis
Assuming the company does not invest in the new product line; prepare forecasted income statements and balance sheets at year-end 2010, 2011, and 2012. Based on these forecasts, estimate Flash's required external financing: in this case all required external financing takes the form of additional notes payable from its commercial bank, for the same period.
Using the assumptions given in the case, all elements of income statement and balance sheet can be projected for next three years 2010, 2011 and 2012. Sales cycle of the products of the company is such that sales of a particular product increases initially for few years and then starts to decline as the new technology
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Sales from the project have been estimated to be $21.6 million, $2.8 million, $2.8 million, $1.1 million and $0.5 million for years 2011, 2012, 2013, 2014 and 2015 respectively. Cost of goods sold has been estimated to be 21% of revenue for all the five years. This is significantly lower than the cost of goods sold as % of sale for the existing business of the company i.e. 81.1%. However selling, general and administrative expenses will remain at the same level i.e. 8.36% of sales. Furthermore, there will one time advertising cost of $300,000 for year 2011. Operating income values for the next five years come out to be $2.43 million, $3.539 million, $3.539 million, $1.39 million and $0.632 million respectively. Using these values and applying the tax rate of 40%, net income values for next five years come out to be $1.458 million, $2,123 million, $2,123 million, $0.834 million and $0.379 million respectively for years 2011, 2012, 2013, 2014 and 2015 respectively. The equipment purchased for $2.2 million in 2010 will be depreciated on a straight line basis for five years. Therefore, annual depreciation comes out to be $440,000 for the next five years. Working capital will remain at 26.15% of sales for the project in next five years. So, as sales value changes, so does the working capital requirements. Changes in net working capital can be calculated by subtracting working capital for the previous year from working capital for the