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    Superior Living, Inc Project Financials: Financial Statements and Plans

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    After meeting with the VP of Accounting, you believe you need to get a better understanding of the plant construction project. You call the financial analyst working on the project and ask that she bring the financials to you to discuss the valuation methodologies. Meeting with the financial analyst, discuss three key valuation methodologies that companies use-- NPV, IRR, and MIRR.


    Superior Living, Inc. is a private, domestic U.S. manufacturer of home furniture targeted at U.S. consumers ages 21 to 54 (from first-time apartment renters to empty nesters). The company generates $250 million in revenues from six product lines: outdoor patio, luxury, durable rental, children's furniture, rare woods, and space saver. The company sells its products through a number of retailers and has a solid business reputation with distributors and customers. Superior Living has divisions for each of the product lines, and each division includes sales, marketing, and manufacturing personnel. The other functional areas "human resources, finance, and information technology" support the entire company. You are the vice president of finance, reporting to the chief financial officer (CFO). Your role includes the responsibility for financial analysis and financial reporting. This includes developing financial statements, monitoring performance metrics, educating the senior officer team on key financial decisions, and valuing new business opportunities that are presented to the board of directors. Superior is looking to go public in the next 6 to 8 months with an initial public offering (IPO). In addition, the company is aggressively pursuing new business opportunities, which may include expansion via acquisition and the development and implementation of new product lines. All of this will require the company to manage its finances extremely well. You are the key officer to lead in this responsibility.

    The CFO has asked you to meet with her to outline the financial plans for the next 12 months. She needs you to develop the three financial statements for the end of the fiscal year, determine the capital investments required for the upcoming year, develop the operating budget, and outline the plan for the IPO. To do this, you will work closely with the VP of accounting and the head of strategic planning. You know that the next 12 months can determine the long-term success of Superior. The CEO and board of directors have made it clear to you and the CFO that the financial plans for the next year should be based on sound, fundamental financial principles and contain as little risk as possible.

    Finally, you understand the company very well and know that the division chief "the senior vice presidents who lead the product divisions" wield a great deal of power and must agree to financial plans. Many of them have expressed that they will need significant expenditures next year, stating that the "running rate will not be enough," referencing the company's longstanding process of developing expense budgets based on the previous year's expenditures plus a small percentage increase. Furthermore, they all have stated that if a merger should occur, it should be with a product line that compliments their division and is brought under their control.

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    Solution Preview

    Valuation Methodologies

    An important part of the plant construction project is selection of valuation methodologies. There are number of valuation methods which are used by companies but the three most common ones are net present value, internal rate of return and modified internal rate of return.

    Net Present Value: NPV

    The NPV model of evaluating an investment calculates the present value of expected project benefits minus the present value of expected project costs. For the purpose of discounting, an interest rate is used which is based on marginal cost of capital to bring the costs and benefits into the present. Usually the weighted average cost of capital or WACC for an organization is used as the discount rate. This is taken from data of past projects from where one can get to know what is the WACC used in past. Projects which have positive NPV are expected to increase the value of the firm and hence the rule is to accept all independent projects that have a positive NPV. When projects are mutually exclusive, the project with largest NPV should be chosen.

    While the method is simple and widely accepted, the analysis is based on user's ability to accurately predict future cash flows. The method also does not take into consideration any unforeseen impacts on the future cash flows.

    Internal Rate of Return: IRR

    Like NPV method IRR method also uses cash flows and recognizes the time value ...

    Solution Summary

    The solution provides financial statements and plans for Superior Living, Inc. Project Financials.