Coast4Life
From: Pat Brown, CMA
To: Board of Directors
Subject: Analysis of alternative strategies to maintain profitability during industry downturn
Since starting operations in 2002, our company has enjoyed immense profit growth as well as healthy liquidity and coverage (see EX-5). However, due to the recent attack, we are anticipating a substantial drop in revenues for the upcoming season. As per my analysis in EX-2, I have determined that if we expect bookings to decline by 30% -assuming that we can rent one boat every year during the off-season at the same rent we earned in 2012-, the company will have a net loss of $515,800. In order to ensure that the company earns a profit despite the anticipated downturn, I have analysed the four alternatives suggested by the Board to maintain profitability during this anticipated downturn.
1) Divesture of Fraser Dry Dock
Under this alternative, the Dry Dock will be sold to an interest party for a $1.7M will be booked. In EX-1 I have calculated NPV of the selling the dry dock. While selling the dry dock will boost income in the following year, it is clear from my analysis that over the long term, the impact on profitability is much more ambiguous. The overall NPV of executing this alternative according to my analysis is $595,467.75. Given that the overall net profit last year was $8,455,000, the long term impact of this alternative is rather small.
While it is clear that the only reason the Dry Dock division is profitable only due to the intercompany revenues (i.e. maintenance of the two ships), closing down this division has a number of downsides. Firstly, we will be permanently cutting off a revenue stream that could be used to mitigate against declining revenues in other divisions. Also, laying off the entire staff could be detrimental to the relationship the company has with the local community as well as damage the reputation for safety that Coast 4 Life currently has.
2) Targeting a More Profitable Segment
To: Board of Directors
Subject: Analysis of alternative strategies to maintain profitability during industry downturn
Since starting operations in 2002, our company has enjoyed immense profit growth as well as healthy liquidity and coverage (see EX-5). However, due to the recent attack, we are anticipating a substantial drop in revenues for the upcoming season. As per my analysis in EX-2, I have determined that if we expect bookings to decline by 30% -assuming that we can rent one boat every year during the off-season at the same rent we earned in 2012-, the company will have a net loss of $515,800. In order to ensure that the company earns a profit despite the anticipated downturn, I have analysed the four alternatives suggested by the Board to maintain profitability during this anticipated downturn.
1) Divesture of Fraser Dry Dock
Under this alternative, the Dry Dock will be sold to an interest party for a $1.7M will be booked. In EX-1 I have calculated NPV of the selling the dry dock. While selling the dry dock will boost income in the following year, it is clear from my analysis that over the long term, the impact on profitability is much more ambiguous. The overall NPV of executing this alternative according to my analysis is $595,467.75. Given that the overall net profit last year was $8,455,000, the long term impact of this alternative is rather small.
While it is clear that the only reason the Dry Dock division is profitable only due to the intercompany revenues (i.e. maintenance of the two ships), closing down this division has a number of downsides. Firstly, we will be permanently cutting off a revenue stream that could be used to mitigate against declining revenues in other divisions. Also, laying off the entire staff could be detrimental to the relationship the company has with the local community as well as damage the reputation for safety that Coast 4 Life currently has.
2) Targeting a More Profitable Segment