Expert Systems
The Expert Systems case focuses around a business that develops computer programs for firms in the banking industry. John Grady, CFO for ESI, needs help in creating a detailed forecast for the executive meeting and to present it to the group. Using the information given in John’s memos, his questions must be answered to help show the top managers how certain assumptions affect various outcomes.
One of John’s memos includes the percentage-of-sales formula to calculate the additional funds needed (AFN) to support the projected increased level of sales. John explains that AFN is calculated by subtracting spontaneous liability increase and increase in retained earnings from the required asset increase. This formula is shown below:
AFN = (A*/S)DS – (L*/S)DS – MS1(1-d)
We calculate the AFN as $2.76 million. Please see the attached spreadsheet for full calculations. Once we complete Table 3, provided by John, we can also calculate the AFN with the financial statements by taking the difference between the total assets and the total liabilities and equity. AFN calculated in this form equals 2.89. Please see attached spreadsheet for completed financial statements and cumulative AFN. Since the vice-president feels that the fixed assets were actually being operated at only 80% of capacity the projected external capital requirements must be recalculated. We must first calculate what full capacity sales would be by taking the actual sales from 1995 and dividing them by the percentage of capacity, in this case 80%. This suggests that if the fixed assets had been used to full capacity, 1996 sales could have been as high as $70.2 million. We then use this amount to estimate the target fixed asset to sales ratio by taking the 1995 fixed asset amount and dividing it by the full capacity sales; this results in 26%. Finally, we calculate the required level of fixed assets by multiplying the above ratio with the projected 1996 sales; resulting in a required fixed asset level of
One of John’s memos includes the percentage-of-sales formula to calculate the additional funds needed (AFN) to support the projected increased level of sales. John explains that AFN is calculated by subtracting spontaneous liability increase and increase in retained earnings from the required asset increase. This formula is shown below:
AFN = (A*/S)DS – (L*/S)DS – MS1(1-d)
We calculate the AFN as $2.76 million. Please see the attached spreadsheet for full calculations. Once we complete Table 3, provided by John, we can also calculate the AFN with the financial statements by taking the difference between the total assets and the total liabilities and equity. AFN calculated in this form equals 2.89. Please see attached spreadsheet for completed financial statements and cumulative AFN. Since the vice-president feels that the fixed assets were actually being operated at only 80% of capacity the projected external capital requirements must be recalculated. We must first calculate what full capacity sales would be by taking the actual sales from 1995 and dividing them by the percentage of capacity, in this case 80%. This suggests that if the fixed assets had been used to full capacity, 1996 sales could have been as high as $70.2 million. We then use this amount to estimate the target fixed asset to sales ratio by taking the 1995 fixed asset amount and dividing it by the full capacity sales; this results in 26%. Finally, we calculate the required level of fixed assets by multiplying the above ratio with the projected 1996 sales; resulting in a required fixed asset level of