Should the Scuba Business Dive Into the Expansion? Case Solution
1.Â Â Â Â CAPITAL REQUIREMENT
With every business the prime concern in the case of expansion is the capital requirement. Companies have less capital available for the other business transaction, which highly requires that managers should weigh the market potential of the expansion before making any kind of the investment.
2.Â Â Â Â UNCERTAINTY IN THE RETURNS OF THE BUSINESS
Opening another dive shop can likely result in the loss of the company as there is always the factor of uncertainty attached with the future earnings due to several other reasons.
3.Â Â Â Â SPREAD TOO THIN
With the given investment the companies increase their risk of expanding the business resources as well as their expertise. It is the prime perception that expanding can prove things to go well. However, it is not always the caseasÂ improves the ability of the company where it does not perform well.
The quantitative analysis is performed with the help of the local department of Tourism, which provides a comparable statistical data for a dive shop which is located outside the Radisson Report.
Projection of Income Statement
In order to project the income statement for the years 1997 and 1998, the case provides the details of the value of the revenues of the comparable company and formulated the regression equation for both the sales revenues as well as for the profit from operations which are used to project for the year 1997 and 1998. As it can be seen from the income statement that the year 1996 is generating a net loss for the company of $67, 281, with the help of efficient utilization of the excess capacity by opening a new dive shop the company would be able to regenerate the profit for the company. The result of this increased sales revenues as well as the increased in the profit from operations shows favorable conditions for the company.
Projection of Balance Sheet
In order to project the balance sheet of the company for the year 1997 and 1998 some assumptions are made which relate to the assets and liabilities of the company. Aside from the value of additional investment in fixed assets and inventory all the remaining assets are kept same. Moreover, on the liabilities side, except the value of short-term bank loans, all the remaining current liabilities are kept same. In analyzing the balance sheet, it shows the decreased values with respect to the previous years, the reason of this worst solvency ratio is the requirement of the huge investment that the company is required to made which can ensures the future enhanced performance.
By analyzing the proposed investment alternative qualitatively as well as quantitatively, it seems that the proposed investment in a dive shop is beneficial for the company as it is solving the under utilization of the companyâ€™s excess resources and generating the future revenues. Although the investment is causing the solvency ratio to disturbed significantly however, it will be improved in the future. Moreover, the place which Mr. Andy has proposed Holiday Inn is quite reasonable for his business which can ensure wider number of younger customers that are likely to be actively participated in these kind of activities……………
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