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Flash Memory Inc. Essay

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TO: FROM: DATE: SUBJECT: Mr. Hathaway Browne, CFO of Flash Memory Inc. MP.JAW Consultants October 11, 2010 Analysis of the Investment Opportunity and Financing Options ! As your financial consultants, we have conducted a comprehensive analysis of Flash Memory Inc. (FMI)’s current business situation, its new potential investment opportunity, and financing options. Our recommendations are as follows: 1. Pursue the suggested new product line. 2. Seek additional funding through equity financing and reinvestment of earnings. We proceed to present our findings, analyses, and rationales behind these recommendations. Current Business Environment FMI is a small private firm specializing in manufacturing “solid state drives” (SSDs), a …show more content…

The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project. Impact of New Investment on Forecasted Financial Statements Given our recommendation to accept the new investment opportunity, this project will impact the forecasted financial statements from 2010 onwards. Please refer to Exhibits 6 and 7 for the revised projections. 3 In the revised income statement, projected net income after taxes would significantly increase from $3,963K to $4,651K in 2011, and from $3,818K to $4,716K in 2012. This is predominantly driven by the sales growth of $21.6 million in 2011 and $28 million in 2012. Without this project, net income would have otherwise peaked in 2011 and decline in subsequent years. Thus, this investment

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