BUU33740: GMC Sports plc (“GMC”) is a large retailer of sports equipment, clothing, and supplies operating across Ireland: Financial Management Assignment, TCD, Ireland

Assignment Brief:

GMC Sports plc (“GMC”) is a large retailer of sports equipment, clothing, and supplies operating across Ireland, with the hope of moving into the UK marketplace in the future. With the recent increased focus on personal health, GMC have enjoyed a steady increase in product sales and revenue over the last number of years.

However, due to the recent cost-of-living crisis in Ireland, GMC has experienced a notable decline in sales in the last number of months.
In response to this, GMC are currently considering releasing a new product to the Irish marketspace which would be considerably cheaper than one of their current product offerings.

therefore replacing a current product offering. Furthermore, GMC are concerned about their current cash flow position within their company, noting concerns with their current liquidity and solvency positions.

Requirement:

Your uncle Gerry, one of the founding members of GMC, has requested your assistance with a number of queries which are outlined below. Gerry has instructed you to prepare a report to address the different concerns (Part A — Part E) outlined below.

In relation to the theory elements, Gerry has outlined that he would appreciate some in-depth research and examples to assist with his understanding of the different concerns raised. (Note to students: students can include all parts in the report)

Part A

As outlined above, GMC have developed a new product which will replace an existing product offering.

The following information is available: • GMC engaged a market research company to execute research on the viability of this new product offering. GMC paid €110,000 in relation to this market research.

• The market research company have indicated that the estimated product life cycle will be four years, after which production will cease for a new product offering.
• The purpose of this new product offering is to replace a current product offering; therefore, the introduction of this product is expected to lead to a reduction in sales of the existing product by €245,000 per annum over the life of the product.
• The production of this new product offering will require the purchase of additional specialist machinery costing €950,000. This machinery will be required immediately.
• This specialist machinery will be depreciated at 25% per annum utilizing the straight-line method of depreciation. The expected scrap (residual) value of this machinery at the end of the project is estimated at €150,000.
• Existing fixed overheads of €15,000 per annum will be reallocated to the new project.
• Additional working capital of €100,000 will be required. • Market research has indicated that variable overheads are estimated at €2.50 per unit.
• Each unit of the new product requires half a kilo of raw material to manufacture. The current cost of materials is €5 per kilo.
• Each unit of the new product will take half an hour to manufacture. Machine operators are currently paid €9 per hour and no wage increases are forecasted for the next four years.
• GMC intends to spend €250,000 in each of the first two years promoting the product [Year 1 + Year 2].
• It is intended that the cost of the specialist machinery noted above will be financed by means of a bank loan at a fixed interest rate of 6% per annum.
• The cost of capital for GMC is 11% per annum.

Requirement:

Calculate the Net Present Value of the new product utilizing the cost of capital noted above. Please note, it can be assumed that all cash flows occur at the end of the year unless otherwise stated.

Taxation may be ignored for the purposes of this calculation. GMC has a policy of requiring all projects to produce a positive Net Present Value before accepting the project.

Part B

GMC are also interested in the payback period of the project and require all projects to payback within a 2-year period before accepting the project. Based on your calculations above, calculate the payback period of the project.

Part C

Provide a recommendation to the management of GMC advising if they should proceed with the new product offering providing specific reasons for your decision.

As part of your discussion, based on your calculations completed above, provide a brief rationale for any items, if any, that were omitted from the Net Present Value Calculation.

Part D

As outlined in the details above, GMC intend to finance the cost of the machinery by means of a bank loan at a fixed interest rate of 6% per annum. The company will have to approach the bank for such funding. Discuss, in detail, three factors the bank will take into account before approving the loan.

Part E

One of the main challenges facing many companies in the Irish marketspace is the increase in expenditure arising from (the current cost of living crisis. Increase in fuel costs and:the living wages has had a direct impact on the profit line of many companies and impacting their liquidity as well.

Due to the above financial pressures, GMC have reviewed their worrying liquidity position of the company. To their surprise, the company has recently seen its Receivables Period increase from 50 days to 85 days and is worried about the effect that this is having on its cash flows.

Discuss four techniques that the company can use to improve the collection period and how they can improve cash flow.

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