Professional Documents
Culture Documents
Considering the proposed addition of ShoeShock to the Shoe Division, should Mr.
Manlapig pursue its investment plans for ShoeShock production?
This alternative will result to ROA ratios of 15.17% and 26.61% for the next two years,
which surpasses the Group’s target ROA of 13%. Though the Sales to Asset ratio are
slightly lower compared to having a 4-year product life cycle, still the projected ROA
will be higher compared to the current year which is only at 14.95%. All ratios measured
will be higher than the target ROA of 13%.
Depreciation expense will be maximized at the end of the machine’s useful life and
appropriate tax dues will also be applied.
2. Implementation of the project ShoeShock using the machine’s useful life of four years.
This will result to a ROA ratio of 13.20% (slightly higher than the Group’s target ROA)
on the first year and an increase to 26.02% on the second year. Depreciation expenses
are higher relative to the 10-year useful life assumption, making tax dues lesser.
However, at the end of four years when the machine is fully depreciated, the value of
the machine will be considered a sunk cost. If no new depreciable assets are acquired,
depreciation expense is expected to decrease resulting to a higher taxable profit.
Even without ShoeShock production, the company is still able to meet the Group’s
target ROA. However, there is a lost opportunity of more profitable operations.
Recommendations
We recommend alternative course action number 1. This alternative with its
corresponding assumptions will result to a higher sales-to-asset ratio and exceeding
the target ROA, while maintaining the Company’s conservative debt ratio. All the ratios
measured, which is relatively important to the company, is projected to be higher than
the Group’s target ROA.
ATTACHMENT – GENERICS GROUP OF COMPANIES’ PRO FORMA FINANCIAL STATEMENTS