Part 1: Ace Company Loan Recommendation – Executive Summary

This section analyzes Ace Company’s creditworthiness and finances to prepare for a possible $3 million, 10-year equipment loan from Ace Company. There was impressive consideration for Ace Company from 2021 to 2022. In 2022 and 2021, net profit margin was 11.3% and 12.5%, respectively. 2022 earnings per share were 15.8%, and 2021 earnings per share were 13.0%. The times interest earned ratio stood at 7.08 in 2021 and 9.97 in 2022. The company’s ratio of accounts receivable turnover and average collection period of accounts receivable also improved, with 2021 stats of 4.58 and 79.7, respectively, and 2022 stats of 5.06 and 72.1, respectively. Some weaknesses were also observed. The current ratio showed a decrease from 1.68 to 1.37. Current liabilities increased from $7,500,000 to $10,750,000. The inventory turnover ratio decreased for the company from 1.92 in 2022 to the industry average of approximately 10 times a year. The conclusion made based on the metrics reviewed for this company is that the loan should be conditionally approved based on collateral, predicted earnings, and the company-delivered payment plan.

Accounts Receivable Collections Trend Analysis

Any company’s accounts receivable policies have an effect on its bottom line. Ace Company’s policies reflect both a receivable and collection rate turnover of 5.06 in 2022 and 4.58 in 2021. This shows an improvement in the company’s policies, resulting in an increase in the company’s overall liquidity and a decrease in the risk of overall insolvency. Saleh et al. (2024) say that an improvement in the turnover of receivables is a result of the improvement of internal controls and the initiation of active credit management policies. At Ace Company, the average collection period reduced, and the collection days decreased. Collection days (about 79.7 days) dropped to 72.1 days. An improvement of up to 7 days in the collection of receivables represents a positive change in the operations of Ace Company and is an improvement of the company’s liquidity, credit, and lending position.

Inventory Turnover Analysis

Inventory control is the procedure that tracks the amount of goods and raw materials in and out of a company for the sake of finding the optimal inventory threshold. Between 2021 and 2022, the inventory turnover for Ace Company became even more stagnant, moving from 2.0 to 1.92. Comparatively, the industry standard is 10 inventory turnover cycles in a year. The industry standard suggests that Ace Company struggles in its competitive inventory turnover, and thus the company may be underperforming in a number of areas, such as control of inventory, product demand, and product movement velocity. According to Mohamad (2024), maintaining inventory turnover ratios that are lower than industry standards can raise inventory holding costs and make the inventory become obsolete. The lack of demand, coupled with the negative trajectory, indicates that Ace Company is suffering from an inventory control issue. The absolute decline in inventory turnover and the negative industry trend are alarming to the lender. The trend shows that the declining inventory turnover is a strong indicator that Ace Company may have a poor operational performance, where the line of credit with the lender may be utilized inefficiently.

Short-Term Creditworthiness Evaluation

By analyzing the cash and cash-equivalent assets on hand to pay upcoming obligations, short-term creditworthiness evaluates the ability of a firm to meet its liabilities. From 2021 to 2022, Ace Company’s current ratio decreased by 0.3. The total current liabilities also increased significantly (from 7,500,000 in 2021 to 10,750,000 in 2022). According to Sardo et al. (2022), a company’s liquidity position is compromised if the current ratio decreases alongside an increase in current liabilities.

• Long-Term Creditworthiness Evaluation

Long-term creditworthiness evaluates a company’s ability to take on additional debt for an extended period. Ace Company also had some slight deleveraging, as the total debt to equity ratio increased slightly from 3.2 to 3.08 in 2021 and 2022, respectively. However, an increase in long-term liabilities was also apparent from 11,000,000 in 2021 to 11,500,000 in 2022, which again keeps financial leverage elevated. The times interest earned improved from 7.08 times in 2021 to 9.97 times in 2022, signaling that the company is in a stronger position to meet its debt obligations.

• Loan Recommendation

Risk assessment requires a combination of both quantitative and qualitative approaches. Beginning with the quantitative, Ace Company has shown improvement with its net profit margin and earnings per share improving from 11.3% to 15.8% and from 3.59 to 5.78, respectively, from 2021 to 2022. Qualitatively, Andini and Imronudin (2026) describe a significant financial risk due to a poor current ratio, growing liabilities, and a lack of inventory turnover. Both qualitative and quantitative analyses describe the same conclusion; therefore, it is recommended that Ace Company be granted a conditional loan whereby they provide sufficient collateral as well as a detailed loan repayment plan.

Part 2: ZXY Expansion Investment Recommendation – Executive Summary

This section will analyze the investment proposal put forward by ZXY Company for an expansion worth $7,000,000 to introduce two additional food items into the market and build a second manufacturing facility. This expansion will have a $1,000,000 salvage value and a duration of 10 years. The predicted preliminary income statement after 10 years estimates total revenues of $56,840,000 and total COGS of $23,675,993, resulting in a total net income of $17,339,027 after 7 years of depreciation. The negative cash flows after tax for the first three years are projected to be -$42,733, -$121,460, and -$740,944, respectively, after which, cash flow will be positive starting from the fourth year. The investment is validated with the sensitivity analysis, which showed that the revenues and costs would have to change only slightly for the break-even point to be a decrease in revenue of 25 to 30 percent (Perrelli et al., 2023). Just considering these factors, ZXY Company’s expansion is justified based on the time value of money with the MACRS, the favorable net cash flows, and reasonable liquidity and profitability in the near and long term.

Project Risk Assessment

Even taking into account the financial and operational risks associated with ZXY Company’s planned expansion, the investment is considered to have acceptable risk. As a result of ZXY Company’s planned expansion, negative after-tax cash flows of (-42733), (-121460), and (-740944) are expected for Years 1, 2, and 3, respectively. Cash flows in Years 1, 2, and 3 are expected to amount to zero, and therefore, risk exposure from a financial perspective is significant over the operational incubation period. According to Wang (2025), projects with low revenue streams in the incubation period and that also require high investment have significant exposure to liquidity risk.

ZXY Company will be required to achieve growth in cash flows to support both product lines. ZXY Company’s projections for cash flows from the industry over a 10-year period are expected to be in excess of $56,840,000. The estimated costs to ZXY Company’s operations in Years 1 and 10 of $495,000 and $1,125,000, respectively, are expected to reduce the risk of the company not meeting FDA and SQF compliance. ZXY Company is expected to achieve the long-term operational profitability necessary to offset the liquidity risk. However, the operational cash flows proposed would expose ZXY Company to a liquidity risk, and therefore, ZXY Company should exercise financial and operational controls to alleviate the risk during the proposed cash outlay for the expansion.

• Sensitivity to Revenue and Expense Variations

As part of the complete capital budgeting analysis, it is necessary to assess the variation of the expected revenues and expenses to determine if the investment still holds value. Based on the ZXY’s original projection, the firm is expected to gain about 17,339,027 in savings after 10 years, which indicates that the firm will find it very easy to justify proceeding with the investment. It is assumed that expected savings will drop by around 25-30% on projected revenues before the firm begins to incur an appropriate level of net income loss, and subsequently, the firm will not be able to achieve its cumulative positive cash flows. According to Borgonovo (2023), the primary purpose of a sensitivity analysis is to assess the extent of changes to each of the estimates of the managers that the firm can tolerate before the investment should be revised.

In terms of costs, the total COGS (cost of goods sold) for the 10 years will reach $23,675,993, while other operating costs will reach $5,374,724, meaning that the total costs will be around $29,050,717 to the firm. This would make the project infeasible if cost overruns were about 20%. The first-quarter cash flows were to become negative, combined with an expected loss of revenues. The after-tax cumulative cash flow becomes positive only in Year 4. This means that revenues, whether intentionally delayed or not, after Year 4, would further decrease the value of the investment. The following scenario would be considered firm if the variance of revenues and the variance of operating costs were low to medium, but the scenario would be deemed infeasible if the firm experienced a combined negative impact on revenues and operating costs that resulted in multiple conditions that negatively impacted the firm (Puisa et al., 2023).

• Depreciation Method Comparison

Selecting a depreciation method can affect more than just the net income shown; it can also affect future net income and the tax outlay. Using a MACRS 7-year schedule, we have a first-year expense of 185,770, an expense of 652,915 in year three, and 33,450 in year ten. Total expenses by that time will be 3,350,000. The use of straight-line depreciation over ten years will produce a yearly expense of 600,000, resulting in the total depreciation expense being 6,000,000, leading the value to 6,000,000, with a salvage value of 1,000,000. MACRS will give a greater cash flow from depreciation due to early-year tax benefits, so we will have MACRS. As ZXY has a negative after-tax cash flow, we will have more need for tax cash flow benefits.

Investment Recommendation

Practical investment should involve analysis of financial estimates, strategic risk analysis, and alignment with organizational objectives. Based on the financial analysis, ZXY Company should consider investing $7,000,000 to add 2 more product lines and an additional production facility. With an after-tax 10-year cumulative cash flow of $17,339,027 and an after-tax cumulative value of $56,840,000, the expansion makes a lot of financial sense. Any investment that makes cash flows above the threshold that justifies the investment in the project should be considered, provided that the liquidity requirement is satisfied (Jiang et al. 2022).

Recommendation is based on ZXY obtaining an active credit facility in order to offset negative after-tax cash flows of -$42,733 in Year 1, -$121,460 in Year 2, and -$740,944 in Year 3. Management should exercise tough measures, especially on payroll, which rises from $495,000 in Year 1 to $1,125,000 in Year 10 without justification. The first phases of a business require excellent financial control if the expected long-term investment returns are to be achieved (Garad et al., 2024). Also, a market watch should be implemented to track the sales of Product B, which is expected to commence in Year 4 at $900,000 and $5,500,000 by Year 10.

Supporting Criteria for Recommendation

The prognosis for many of the financials seems to justify the $ZXY expansion investment proposal. First, the project has a substantial NPV at $17,339,027, and it is anticipated that the project would reach an estimated cumulative ten years of projected net income. Among the other signs of a reasonably profitable project at the expected levels of investment, MACRS depreciation provides a sign of expected profitability. Cumulative after-tax cash flows are expected to turn positive, also within the time frame of the asset’s ten-year economic life, in Year 4, which would also be considered an acceptable payback period. According to Barbieri et al.

The payback period would be expected during the first half of the economic life of an asset. It is generally considered an indicator of a reasonable balance between risk and return, and, therefore, a good criterion for a capital allocation decision. Third, the total income of $56,840,000, the value of Product A at $34,640,000+, and the value of Product B at $22,200,000+, is based on multiple (or \product) and is a source of long-term retention. Fourth, the MACRS benefits of the first few years of extremely risky business operations provide a retention of cash flow and a tax shelter. The last warrant that these investment choices can be reasonably made is the sensitivity analysis, which shows that revenues, at least to the base, can be anticipated to be 25-30% lower, and that costs can be anticipated to be considerably more (Perrelli et al., 2023). Taken together, the criteria justify the conditional approval of the ZXY expansion investment.

Conclusion

Based on the positive cash flow in Year 4, the cumulative cash flows of $17,339,027, and the MACRS, ZXY Company can build the financial justification. To benefit from the early tax shelter of Operational cash flows, the company will have to raise enough cash to cover the shortfalls in the first three years.