Reference no: EM133016947

Question - Armando immigrated to BC three years ago. As an MBA student, he started working part-time for a local construction company. While working with his employer for two years, Armando realized that there was a huge demand in the sector. Coupled with a shortage of labour, there were long wait times for the construction of new homes and renovations.

Armando noticed that delays often resulted from supplies being out of stock. Often, he was asked by his employer to go to an out-of-town building supplies retailer to pick up things that had run out at closer locations. This was not only a recurring waste of time but an added cost to projects, especially considering how often he had to drive lengthy distances.

As he neared graduation, Armando decided he wanted to continue in his line of part-time work with a new business idea. He would help home builders, renovators, and tradespeople with minimizing supplies-related delays. By building and maintaining great business relationships with individuals and businesses in the construction sector, he would identify and prevent shortages in advance and ensure delays were minimized.

He revealed the idea to his boss, Gary, after giving his two-week notice. Gary agreed it was a great business idea and even asked to be Armando's first client! He would keep Armando updated on projects and their respective supply needs so Armando could ensure everything had arrived on time for Gary and his workmates to work uninterrupted.

After securing Gary as a client, Armando went to work on building great relationships with suppliers. He informed them of his business plan and opened business accounts which allowed him to buy supplies for 20% less than retail price and pay for everything at the end of the month. Armando is wondering if it really is advantageous to pay large monthly bills instead of settling amounts immediately.

Armand anticipates generating profits in a couple of ways. First, he will purchase supplies for customers/contractors and arrange delivery directly to the work site. For this service, Armando is planning to simply "sell" the goods to his customers at the supplier's regular price, so his profit margin would essentially be the discount he receives, less delivery/transportation expenses. Armando realizes there may be some extra work required in the instances that supply needs can't be fulfilled in one location, which, in his experience, has been a common reason for delays. He will make sure he is proactive in these situations, canceling partially pending orders quickly and purchasing supplies from elsewhere.

Secondly, Armando will obtain permission to cancel pending orders from customers and contractors, under the guarantee of no delays or higher costs (beyond Armando's fee). So, if there is a half-shipped order without an imminent fulfillment date, Armando would cancel the remaining order and make a new one with a different supplier/location in the region. For this service, Armando is planning to charge 15% of the new order value to the customer/contractor. In most instances, avoiding the construction delays and/or effort of driving around on short notice would be well worth Armando's fee.

Armando estimates that, with $5,000 worth of marketing in his first year, he can obtain 50 projects where he fully supplies certain materials. Additionally, he believes he can secure 100 order modifications agreements, where he can get full shipments of materials to the site quicker. Armando estimates that the materials for the 50 projects will cost him a total of $250,000, without shipping. For the modified order, he expects the average new order to be $2,500.

Armando believes that his 50 projects will have an average of 4.5 orders each. Overall, he anticipates purchasing delivery on half of all his orders and driving in the other half. Each delivery has an average cost of $75. Armando estimates that his motor vehicle costs, such as insurance, fuel, and maintenance total $350 per month.

In January of last year, Armando purchased a used Ford F150 truck for $4,000. He believes it has a current retail value of $3,000 and can be used for three more years (at which point it would be worth nothing). Armando isn't sure about the accounting for the truck over the past year. He is currently leaning towards increasing truck expenses by $4,000 and decreasing cash by $4,000. He drove the truck 24,000 kilometers last year and expects similar usage going forward.

Armando is considering upgrading to a bigger newer truck in his second year. It will help him grow revenues by 10% in the second year (but remain flat afterward) and complete 75% of deliveries himself instead of half. With these changes, Armando expects his current monthly motor vehicle costs to rise by one-third. A three-year lease on the truck would also result in a monthly lease payment of $500.

Alternatively, Armando is considering buying the truck outright for $35,000. He would use a 6% line of credit to make the purchase. Armando wants to use a 3-year investment time horizon for his decision, but he expects the truck to be useful for twelve years when it will be $3,000. Armando understands he needs 25% of current after-tax profits (tax rate is 10%) for living expenses but is willing to invest the rest of the money in his business. He wants advice on if he should sell his old truck and acquire the new one, and how.

Can you make a business report for Armando, including cash projections for the next three years. Discuss all relevant issues, including the pros and cons of each course of action. Outline any questions/inquiries which should be directed to Armando & why the information is important to certain decisions.