Baldwin bicycle company: financial, marketing assignment

Besides, an incremental asset related cost of $143, 322 will incur for carrying the deed working capital involved in the Challenger deal. To meet the increased annual production, Baldwin should invest at least 685, 511 in working capital including such as inventories and accounts receivable. Excluding the reduced assets due to centralization, the company’s accounts receivable will increase 11% and inventories will increase 19%, which add $143, 322. 42 asset carrying cost annually. In addition, there will be a one time cost of $5000 for preparing drawings and arranging sources.

Fortunately, adding the Challenger line will not incur any capital investment for additional capacity since the company’s current capacity is still sufficient for the 122, 000 units’ annual production. Putting all the relevant cost and benefit related to the Challenger deal together, the company could expect $298, 968 incremental pre-tax profit and $161 , 177. 03 after tax profit from the Challenger deal. For purely profit minimization purpose, the deal is attractive. The return on investment of the Challenger deal is 23. 5% (= 161 , 177. 03/685, 511. 3), twice as much as the cost of financing receivables and inventories (1 1. 5%). Challenger deal cash flow analysis As analyzed above, to earn the additional $161 , 177. 03 profit from the Challenger contract, the company should invest at least $685, 511. 03 in working capital to execute the HI-Value contract. If the company can’t get any current debt or trade payable financing, the operational cash flow will slip more than 500, 000. The company’s current cash of 342, 000 is not enough to cover this and external debt or equity financing is needed to support the new business.

Both of the risks are critical to Baldwin strategic positioning. Operational Risk As the 22, 000 (25, 000 less 3, 000 lost) additional units will push Baldwin to over 90% capacity, the company may face the risk of over-capacity if the regular business recovers in the future. In that case, to meet the operational efficiency, the company has to either invest more capital in capacity or forgo the market upturn opportunity. Either of them makes Challenger deal unnecessary, because the former will add paramount financial burden while the latter will induce more opportunity cost than Challenger’s profit.

In addition, the 90% capacity utilization is high enough to cause operational distress. Queuing problem may occur due to the volatility of incoming orders. This will Recommendation Given Baldwin current poor performance, the HI-Value offer is tempting. But it could be disastrous in the long run if the risk factors identified above turn the wrong way. To avoid being fascinated merely by the short run profit, Baldwin would better first conduct a thorough demand forecast and then negotiate a better deal with HI-Value before accepting the offer.