Strategic Plan for Missouri Can Company
Introduction
A successive company is influenced by the strategic plan it lays in determining the investment path it will pursue. A strategic plan entails a document indicating the organization’s goals, actions, and development elements that will be employed to realize such goals. Thus, strategic planning involves the definition of an organization’s strategy and decision-making on resource allocation to pursue the intended goals and objectives (Morden, 2016). However, the effectiveness of a given strategic plan depends on the soundness of the recommendations arrived in defining the direction that should be undertaken by a company. The soundness of the recommendations is based on their viability in promoting the performance of the company. This paper seeks to develop a strategic plan for a hypothetical company, Missouri Can Company (MCC), for the next five years. The strategic plan offers recommendations to the company’s management based on the feasibility study conducted from the diverse proposals that have been offered.
Missouri Can Company (MCC) Present Situation
The current problem facing MCC entails determining the strategic approaches that should be applied in its four respective divisions to enhance its competitiveness and profitability. The company has been facing a diminishing competitive advantage in its financial services, packaging, energy, and forestry divisions over the years. The decreasing competitive advantage has seen its ability to attract and retain customers deteriorate, which has affected the company’s revenue generation. Equally, the loss of business has placed the company’s profitability on a decline, which has had a negative effect on its future sustainability.
MCC’s management is considering the optimal strategic move it should undertake to revive its glory. The management has been offered diverse strategic proposals that they can employ to enhance the performance of the company in the next five years. The proposals cover the investment decisions that should be considered in each of the four divisions. Thus, an analysis of the different proposals under consideration has been conducted to offer the recommended course of action that should be considered by the management in the next five years.
Strategic Plan Analysis and Recommendations
The financial impacts of each of the decisions considered for each of the four divisions have been used in arriving at the recommendation. The financial analyses that have been conducted involve capital budgeting assessments to evaluate the feasibility of the available decisions. Thus, the capital budgeting approach has been applied to assess the potential of each division’s decision to generate returns to the shareholders of Missouri Can Company (MCC). In particular, the net present value (NPV) that discounts the future expected cash flows to the present value has been employed as the capital budgeting analysis model (Charifzadeh & Taschner, 2017).
Financial Division Analysis
The first division that has been evaluated is the financial services division by reviewing the proposal offered by the consultant. The proposal under consideration is the expansion of the division by investing a capital amounting to $250,000,000 per year from now and increasing it to $300,000,000 in years five to seven. Equally, the capital investment is expected to decline to $100,000,000 per year in the future. The decision to implement the expansion operation is expected to enable the division to generate -$250,000,000 each year from year one to three, -$50,000,000 in years four and five, and $200,000,000 in years six and seven. The future cash flow is expected to be $300,000,000. Moreover, the salvage value of the investment at the end of its lifespan, if implemented, will be $1,000,000,000. To assess the feasibility of this option and assess whether to recommend it for implementation, its viability has been evaluated using the net present value approach below.
Net present value = C0/(1 + r)0 + C1/(1 + r)1…………Ct/(1 + r)t + salvage value (Brealey, Myers, & Allen, 2012)
Initial cash flow = -$250,000,000
Year 1 cash flow = -$250,000,000 – $250,000,000 = -$500,000,000
Year 2 cash flow = -$250,000,000 – $250,000,000 = -$500,000,000
Year 3 cash flow = -$250,000,000 – $250,000,000 = -$500,000,000
Year 4 cash flow = -$250,000,000 – $50,000,000 = -$300,000,000
Year 5 cash flow = -$300,000,000 – $50,000,000 = -$350,000,000
Year 6 cash flow = -$300,000,000 + $200,000,000 = -$100,000,000
Year 7 cash flow = -$300,000,000 + $200,000,000 = -$100,000,000
Perpetual cash flow = -$100,000,000 + $300,000,000 = $200,000,000
Salvage value = $1,000,000,000
Cost of capital = 10%
Net present value = -$250,000,000 + -$500,000,000/(1 + 10%)1 + -$500,000,000/(1 + 10%)2 + -$500,000,000/(1 + 10%)3 + -$300,000,000/(1 + 10%)4 + -$350,000,000/(1 + 10%)5 + -$100,000,000/(1 + 10%)6 + -$100,000,000/(1 + 10%)7 + $200,000,000/10% + $1,000,000,000
Net present value (NPV) = -$250,000,000 – $454,545,454.55 – $413,223,140.50 – $375,657,400 – $204,904,037.61 – $56,447,393.01 -$51,315,811.82 + $2,000,000,000.00 + $1,000,000,000
Net present value = $1,193,906,762.51
The net present value model provides that a given project proposal should be accepted if it has a value equal or above zero. In contrast, the decision should be rejected if the value is negative. The rationale behind this requirement provided by the model is that a positive net present value indicates that the investment will enhance the wealth of the company owners after considering the time value of money (Kaplan & Atkinson, 2017). However, a negative NPV implies that the value of the firm will be diminished since the cash flows expected in the future will not recover the initial cost incurred after considering the time value of money. Given the proposal’s NPV, the recommendation to MCC’s management would be for the company to consider implementing the strategic plan of expanding its operations to enhance the company shareholder’s wealth. The recommendation to implement the operation is based on the positive NPV, which implies that the decision will help in enhancing the value of the company in the future. The enhancement of its value will help promote its asset position, which is vital to promoting the company’s competitiveness in the future.
Energy Division
The strategic decision under consideration for the energy division is whether the company should consider building a new pipeline in Florida or undertake exploration and production investment. This implies that two mutually exclusive investment alternatives are under consideration in determining the optimal cause of action that should be executed (Charifzadeh & Taschner, 2017). To draw recommendations on which of the two options would be most viable for implementation, a comparative financial assessment of the two alternatives is conducted below.
(a) Florida pipeline decision
Net present value = -$50,000,000 -$50,000,000/(1+10%)1 -$50,000,000/(1+10%)2 -$50,000,000/(1+10%)3 + $300,000,000/(1+10%)5
NPV = $30,561,437
(b) Exploration and production decision
NPV = -$400,000,000 -$400,000,000/(1+10%)^1 -$400,000,000/(1+10%)2 -$400,000,000/(1+10%)3 -$400,000,000/(1+10%)4 -$400,000,000/(1+10%)5 +$150,000,000/10% + $2,000,000,000
NPV = $1,583,685,292
The financial analysis conducted above indicates that the strategic decision that should be considered by the management of MCC is the implementation of the exploration and production decision. The rationale behind the recommendation offered is due to the higher net present value for the exploration and production alternative compared to that of constructing a new pipeline in Florida (Kaplan & Atkinson, 2017).
Packaging Division
The recommendation under consideration for the Packaging Division is whether the company should continue its operation in the next five years or dispose of it currently. The recommendation for this division will be based on the projected cash flows the division will generate in the next years compared to its current value. To assess the best course of action, the present value of the expected cash flows have been computed and compared with the present value of the division to determine the optimal strategic decision that should be considered by MCC’s management. The future cash flows in the next five years have been computed by assuming that they will be declining at equal amounts from the current $230,000,000 value.
Present Disposal Value = $1,200,000,000
Current cash flow = $230,000,000
Decline by year = $230,000,000/5 = $46,000,000
Year 1 cash flow = $184,000,000
Year 2 cash flow = $138,000,000
Year 3 cash flow = $92,000,000
Year 4 cash flow = $46,000,000
Year 5 cash flow = $0
Present value = $230,000,000 + $184,000,000/(1 + 10%)1 + $138,000,000/(1 + 10%)2 + $92,000,000/(1 + 10%)3 + $46,000,000/(1 + 10%)4 + $0/(1 + 10%)5
Present value = $230,000,000 + $167,272,727.27 + $114,049,586.78 + $69120961.68 + $31,418,618.95 + $0 = $611,861,894.68
A comparison between the present value of the division, if it is disposed of currently, and the present value of the cash flows it is expected to generate in the next five years indicates that it would be preferable to dispose of the division. The present value of the five-year cash flow is lower than the current disposal value of the packaging division. Thus, the best recommendation that should be considered by MCC’s management is to dispose of the division currently since it will generate a higher present value compared to the present value of the future cash flows (Brealey, Myers, & Allen, 2012). The disposal of the division will help to service the debts faced by the firm, which will promote its solvency position to pursue alternative investments.
Forest Products Division
The feasibility of continuing the Forest Products Division under its current and expected performance if a new one is opened after six years or disposing of the division are the options under consideration in determining the strategic action that should be undertaken. The decision to dispose of the division at that time instead of constructing a new one will generate $600,000,000 in cash flow. In contrast, the decision to open a new plant will see the company incur an initial cost of $1,000,000,000 and a per-year cash outlay of $50,000,000 for five years. Moreover, the cash flow expected once it starts operating will be -$100,000,000 to -$125,000,000. To recommend the most feasible option for this division to the company, the various options financial aspects have been analyzed below.
Disposal present value = $600,000,000
New plant present value = -$600,000,000 -$50,000,000/(1 + 10%)1 -$50,000,000/(1 + 10%)2 -$50,000,000/(1 + 10%)3 -$50,000,000/(1 + 10%)4 -$50,000,000/(1 + 10%)5 + [(-$100,000,000 -$125,000,000)/2/(1+10%)6]
Net plant present value = -$853,042,656
The comparison between the disposal present value and the net present value of the new plant indicates that the strategic decision that should be considered by the company’s management is disposing of the plant. The construction of the new plant will expose the company to a loss since the initial and consecutive capital invested will not be recovered. In contrast, the decision to dispose of the plant will enable the company to recover its book value after servicing its debts (Bhattacharyya, 2011). Consequently, it is recommended that the company dispose of the forest product division instead of constructing a new plant at the end of six years.
Implementation Uncertainties/Events
The implementation of the proposed recommendations will be exposed to various uncertainties that have the potential to affect the viability of the decisions arrived. One of the uncertainties under consideration is the potential of an increase in the inflation rate compared to the expected rate in the next five years. A fluctuation in the inflation rate will affect the cost of capital that has been employed, which will have an effect on the present value of the evaluated cash flows. An increase in the inflation rate will cause the cost of capital to increase, which will reduce the present value of the future expected cash flows (Needles & Powers, 2011). It is recommended that the company’s management consider adjusting the company’s current cost of capital by 3% to cater for any unwanted potential change in the inflation rate when assessing the feasibility of the diverse divisions’ recommendations.
Additionally, the fluctuation of global oil prices is an event that has the potential to affect the implementation of the energy division’s recommended course of action. The feasibility of the decision undertaken for the energy division depends on the stability of the oil prices in the future. To counter such an event, it is recommended that the company’s management employ a hedging strategy to guard against any unwanted price fluctuations. The hedging strategies of entering into either forward or futures contracts will protect the company from negative effects if the oil prices decrease (Tse, 2017). Implementing these strategies will help the company counter various uncertainties in the future.
References
Bhattacharyya, D. (2011). Management accounting. Delhi: Pearson.
Brealey, R. A., Myers, S. C., & Allen, F. (2012). Principles of corporate finance. New York, NY: McGraw-Hill Education.
Charifzadeh, M., & Taschner, A. (2017). Management accounting and control: Tools and concepts in a central European context. Weinheim: Wiley.
Kaplan, R. S., & Atkinson, A. A. (2017). Advanced management accounting. New York: PHI Learning.
Morden, T. (2016). Principles of Strategic Management. London: Routledge.
Needles, B. E., & Powers, M. (2011). Principles of financial accounting. Mason, Ohio : South-Western Cengage Learning.
Tse, T. C. (2017). Corporate finance. London: Routledge.
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Question 
Develop a five-year strategic plan with cost estimates and a timeline. It should be 5-7 double-spaced, typed (12 point) pages plus exhibits. Your plan should include/address the following points:
Describe the situation facing Missouri Can Company (MCC) at the time of the case. This should include the major issues facing the company and the decisions that need to be made. You are to spend no time on corporate history. You must consider the past, but your analysis and recommendations should be forward-looking.
Strategic Plan for Missouri Can Company
List your specific recommendations for the firm in detail. Analyze and address all four divisions. Explain why each recommendation was made, including the information used and the logic (or analysis) applied to reach your conclusion. As you prepare your analysis, remember that no decision is complete until the financial impact of the decisions is determined. Don’t forget that no strategic plan is complete with a financial analysis. Their current cost of capital is 10%.
If your recommendation(s) need to be taken in a particular sequence, be sure to indicate the proper sequence and the reasons for that sequence.
The company has a requirement that 40% of the net proceeds from the sale of any capital asset must be used to reduce debt.
Discuss the events or uncertainties that are most likely to cause trouble in the implementation of your recommendations and how you would react to them if they were to occur.