Reference no: EM132949527
Prompt
In the five years since its founding, Online Advertising Responses, Inc. has grown rapidly. They currently have 20 employees and expect to hire another 20 in the new year to help manage a large new online state government advertising account. This type of expansion will require a significant investment in both expanded office space as well as general office equipment and technology equipment, including top-of-the-line computers capable of handling advanced graphics software, printers, and other peripherals for each employee. They need a recommendation on what option would be the most cost-effective for them in terms of maintaining positive cash flow. In the past, they have simply purchased whatever was needed outright.
A key consideration for their decision is that the company's only source of revenue is commissions from their clients. Each client has different spending patterns so cash flow varies by quarter. In the fiscal year that just ended, quarterly cash flow from client commissions followed the pattern noted below. They assume that in the coming fiscal year a similar pattern will occur.
Quarter Client Commissions
Q1 $4,290,000
Q2 $5,375,000
Q3 $5,100,000
Q4 $3,500,000
Total FY $18,265,000
For the purposes of estimating cash flow for the next fiscal year, assume that the average salary for the 20 expected new employees will be $75,000. To accommodate the additional employees, assume an addition of another 3,000 square feet of office space at a cost of $175 per square foot.
If they were to buy office furniture for each new employee, the estimated cost is $3,000 per employee.
IT estimates that the appropriate technology package for hardware will be $8,000 per employee for an outright purchase. You should take into consideration the cash flow information for the fiscal year that's just ending, which is provided below.
Management has asked their accountant to develop and recommend on the best options:
To buy outright and own all furnishings and technology
To consider an operating lease for all of the new equipment and furnishings
To consider a capital lease for all of the new equipment and furnishings
Evaluate the three alternatives and give the best recommendation for this company. You must support your recommendation with an analysis of the cash flow's impacts on the different types of leases versus outright purchases. In your analysis, include calculations on the depreciation of both the technology items (with an expected life of 3 years) and the furnishings (with an expected life of 6 years). Your analysis should include the formulas for straight-line depreciation and operating cash flow.
***Must be 3 separate calculations for each of the 3 alternatives and not combined. Recommendations need to be backed by the results of the calculations.
The following provides a statement of cash flows for the fiscal year that just ended. The company's fiscal year aligns with a calendar year ending in December.
Statement of Cash Flows for FY Ending 12/31
Category Money
Client commissions $18,265,000
Employee salaries $3,450,000
Rent $1,800,000
Investing activities Money
Purchase of equipment $140,000
Purchase of furnishings $60,000
Financing activities Money
Additional owner's equity $250,000
Cash on hand as of 12/31 $750,000