Posted: April 9th, 2015

Risk Management

Risk Management

Order Description

ASSIGNMENT #3: Johnny Manufacturing
This Assignment covers material from Modules 7-11
This Assignment is recommended to be a minimum of 4 pages in length.
You will be required to prepare the following:
1. Please describe some of the significant and unique liability challenges this organization faces.
2. Provide any recommendations for risk treatment (including insurance and non insurance recommendations) for the liability risks identified above.
3. Evaluate the capital investment proposal using the net present value method recognizing the expected losses to the capital investment that Johnny Manufacturing is considering as part of their overall risk management strategy. Also discuss:
a. Why it is important for the risk manager to consider the financial effects of an investment or activity on an, what should his or her cash flow analysis incorporate?
b. Why it is important for management to recognize potential accidental losses when considering financial effects of an investment or activity?
Its Beginnings
Tom Smith and John Davis purchased the Toilet Partition Division of West Corporation in 1980 and named their new company “Johnny Manufacturing Inc”.
The company evolved, moving from Oakville to Burlington, Ontario, adding a high quality locker line, opening a U.S. distribution facility in Mentor, Ohio, and generating interest in markets such as Latin America and the United Kingdom.
In 2001 a new ownership group was formed strengthening mutually successful relationships with highly valued customers and suppliers around the world
Through travel and utilization of the latest communication technology, Johnny Manufacturing is committed to listening to its customers and addressing their concerns.
Its Product
Johnny Manufacturing Inc is dedicated to offering exciting, well-designed products.
Johnny Manufacturing is North America’s leading toilet partition and locker manufacturer:
• Toilet Partitions: Metal & Plastic
• Lockers: Corridor and Athletic
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Its Services
On Line Services:
Johnny’s Toilet Partition Specification Creator available on line allows its customers to quickly and accurately create a custom specification and technical detail package. Simply select the appropriate options, choose the technical information you require, and then click “Generate Package”.
Toilet Partition Hardware Guide available on line. This allows customers to see what is in stock and available to meet their needs.
Engineering Services for customized work:
Johnny Manufacturing has in house engineers that work with its customers to custom design layouts to meet their needs. All work is completed and approved by the customer before production commences.
Its Portfolio:
• Rogers Centre, Toronto, Ont.: 485 Toilet Partitions
• Bell Centre, Montreal, Que.: 251 Ceiling Hung Toilet Partitions and 400 Lockers • M&T Bank Stadium, Baltimore, Maryland: 611 Toilet Partitions
• RBC Centre, Toronto, Ont.: 414 Powder Coated Toilet Partitions
• The Meadowvale Business Park, Mississauga, Ont.: 288 Toilet Partitions
• Pepsi Centre, Denver, Colorado: 173 Corridor Lockers
• Lakeview School, Stoneboro, Penn.: Athletic and Corridor lockers
Its Suppliers and Business Partners:
Johnny Manufacturing receives its raw materials from specific suppliers: Steel Partitions: AM Steel Processors, Stoney Creek Ontario Plastic Partitions: QB Plastics, Forte, Quebec
Door Hardware: Teel Steel, Scranton, Penn.
Powdered Paints and Coatings: Fukoshima, Japan
For work in the USA: Johnny Manufacturing uses select distributors to distribute its products. These distributors are responsible for ensuring that the customers receive their orders and arrange to have independent contractors install the toilet partitions and doors and/or lockers.
All Parts and Labour are warranted for 1 year however certain exceptions may apply when dealing with institutional buyers, such as municipal buildings, schools and other government buyers.
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Its Facts
Postal Address
123 New Road Burlington, Ontario
Annual Gross Sales:
Breakdown:
$30,000,000
$10,500,000 Canadian (35%) $16,500,000 USA (55%)
$ 3,000,000 UK & Europe (10%) 65
??Number of Employees:
Covered by WSIB: Yes, except Office Staff
ASSETS
Building #1 Plant
Building #2 Office
Building #3 Warehouse, Buffalo, N.Y.
Inventory (at cost)
Customer Goods (in warehouse at any one time)
Equipment in Plant Office Contents
Computers
All deliveries are made by third party carriers
$11,000,000 $ 4,000,000
Payment terms are discussed and agreed with individual customers. Customers are invoiced within 30 days of work completed for any balances owing.
Distributors in the USA and overseas are responsible for ensuring all orders are received and installation work is completed in compliance with stated and federal laws.
Capital Investment Proposal
A recent study conducted by Johnny’s auditors found an increased demand in “on line services”. As result “Johnny” is considering investing an IT System upgrade to allow it to have more complex orders with speedier proposals and fewer errors leading to fewer losses. In addition, this upgraded computer software system will also enable custom orders to be made “on line” and around the world.
The initial investment of this system is $200,000 and has a ten year life with no salvage value. The new system will help generate $60,000 per year in new revenues. Johnny’s minimum required rate of return is 10% and its tax rate is 40%. Johnny’s uses straight line depreciation. Using 10% Discount interest rate, the present value of $1 received at the end of each period for 10 years is $6.145..
1. Calculate the differential annual after tax cash flows
2. What is the net present value if Johnny’s recognizes annual expected computer
losses of $10,000?
3. If Johnny’s invests $10,000 in a risk control measure that reduces the expected
computer losses from $10,000 to $5,000, what is the net present value?
$
$ $
$ $
$
4,000,000
2,000,000 2,000,000
4,000,000 100,000
400,000
?
4. If Johnny’s decides to purchase computer breakdown insurance with no deductible and a limit that is sufficient to cover any losses, and the premium is $15,000 per year, what is the net present value?
5. If Johnny’s recognizes the annual expected computer losses of $10,000 and must decide between two risk financing techniques: Retention from current cash flows or purchasing computer breakdown insurance with no deductible and a policy limit to cover all losses with an annual policy premium of $11,000, which risk financing technique should Johnny’s use?