Question

In order to complete your case analysis successfully, you should consider

identifying the role you are playing,

assessing the financial reporting landscape considering the user needs, constraints, and business environment,

identifying the issues,

analyzing the issues (qualitatively and quantitatively), and

providing a recommendation for each issue identified in the case.

You are required to prepare for the case before the class and bring any documents that will support your analysis. An average grade will come from you answering questions with basic coverage and accuracy, showing all your preparation. Additional points come from including greater detail, astute and informed commentary where appropriate, and connections to readings and other content.

Respond in a single Word doc (or comparable text editor).

Investment Decisions for Big Spenders Inc.

Background

You are an Analyst for the professional service firm, FINACC LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. It is your first day on the job and a Manager in the Consulting area asks you for some help with an investment decision for one of your large clients, Big Spenders Inc. Ready to make an impression on your first day, you start reading the background information provided by the Manager.

Additional Information

Big Spenders Inc. has been working on diversifying its portfolio of investments and requires accounting advice for a decision between two car cleaning and detailing companies. Your responsibility is to perform a comparative analysis of the profitability of two potential equity investments. Your engagement manager on this job has given you a brief background on the operations of the two companies:

Auto Wash Bot Ltd. (AWBL) has recently completed the research and development of a new touch screen app for all mobile devices. This new technology is both more user friendly than the current technology on the market. Auto Wash Bot Ltd has just signed a major contract to provide the Auto Wash Bot terminal to a major producer of mobile devices. The founder of the business would like to sell a 50% interest in the business for $100,000 in order to finance further expansion of operations.

Popeye’s Muscle Wash Ltd (PMWL) is a self-service, coin operated car wash located in a busy residential area. The company provides all of the services of a typical car wash, including soap, wax, vacuuming as well as pressure washing. PMWL has been long established and enjoys the loyalty and repeat business of many local residents. The current owner is getting up in age and would like to sell 100% ownership interest in the business for $100,000 to pursue retirement. The current year’s income statement is consistent with prior years.

One of the first tasks in the analysis of the potential equity acquisition is an assessment of each company’s current and future profitability. Your manager has provided you with copies of each company’s income statement (see below). Next, you are to calculate the expected return on the investment for each company. You have been asked to discuss any other issues that you believe are relevant to the investment decision.

The Consulting Manager would like you to prepare the report and have it on his desk for review first thing tomorrow morning. Once reviewed, this report will be submitted to Big Spenders Inc. in order to support their decision.

Auto Wash Bot Ltd.

Income Statement

For the Year Ended December 31, 2015

Revenue
$375,000
Cost of Goods Sold
86,250
     Gross Profit
288,750
Other Expenses

   Advertising
35,400
   Office Expense
22,750
   Research
195,000
   Wages and Salaries
40,000
      Total Other Expenses
293,150
Income Before Taxes
(4,400)
   Income Tax
0
Net Income
$(4,400)

Popeye’s Muscle Wash Ltd

Income Statement

For the Year Ended December 31, 2015

Revenue
$375,000
Cost of Goods Sold
163,125
     Gross Profit
211,875
Other Expenses

   Advertising
5,200
   Office Expense
17,400
   Repairs and Maintenance
85,000
   Wages and Salaries
50,000
      Total Other Expenses
157,600
Income Before Taxes
54,275
   Income Tax*
8,413
Net Income
$45,862

                                            

*Tax rate of 15.5% used.

Note to students: Issues are hidden within the case. It is your responsibility to read the case facts and identify the critical issues required for discussion and analysis.

Answer 1

Investment	$100,000		Investment	$100,000
Ownership Stake	50%		Ownership Stake	100%
AWBL		PMWL
Revenue	$375,000		Revenue	$375,000
Cost of Goods Sold	86,250		Cost of Goods Sold	1,63,125
Gross Profit	2,88,750		Gross Profit	2,11,875
Other Expenses			Other Expenses
Advertising	35,400		Advertising	5,200
Office Expense	22,750		Office Expense	17,400
Research	1,95,000		Repairs and Maintenance	85,000
Wages and Salaries	40,000		Wages and Salaries	50,000
Total Other Expenses	2,93,150		Total Other Expenses	1,57,600
Income Before Taxes	-4,400		Income Before Taxes	54,275
Income Tax	0		Income Tax*	8,413
Net Income	$(4,400)		Net Income	$45,862
Current Profitability	$(4,400)		Current Profitability	$45,862
Future Profitability	$161,057		Future Profitability	$45,862
(-4400+195000-29543)
Expected ROI	(50% of $161,057)/100,000		Expected ROI	(100% of $45,862)/100,000
	80.52%			45.86%
Note: For AWBL Since research is complete so from next period it will not incur making a profit of $190600 and after reducing tax at 15.5% which is $29543, net profit will be $161,057
Note 2: For PMWL its all business is repeating in nature so no further growth can be expected
Note 3: For both the cases it is assumed that no sales growth orchange in other factors
Other Considerations:
1 Since AWBL has signed a major contract with mobile company, in future its sales would go up and its production cost is also very low as comparing to PMWL resulting in higher profit.
2 Because PMWL is restricted to Residential area and also not advertising very much its business income is fixed in nature.
Conclusion: By using above factors it is very clear that AWBL has higher return on income and also growth oriented firm so investment in AWBL would be beneficial.

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