Investment Decisions for Big Spenders Inc.

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Table of Contents

Introduction
Analysis of Auto Wash Bot Ltd. Income Statement
Analysis of Popeye’s Muscle Wash Ltd Income Statement
Return on Investment
Conclusion
Recommendation
References

Introduction

In order to diversify its investment portfolio, Big Spenders Inc. has requested FINACC LLP for accounting guidance on choosing between Auto Wash Bot Ltd. (AWBL) and Popeye’s Muscle Wash Ltd. (PMWL). The goal is to compare and contrast the financial performance of these two possible stock transactions. A significant deal has been reached between AWBL and a major mobile device manufacturer for the development of a new touch screen app for mobile devices. The company’s creator is looking to raise $100,000 by selling a 50% stake in order to fund future growth. In contrast, PMWL is a self-service, coin-operated car wash that is situated in a crowded residential neighborhood.

The present owner wants to sell a 100% ownership stake in the company for $100,000 since he is retiring. An evaluation of each company’s present and possible future profitability serves as the first stage in the study of these prospective equity purchases (Lessambo, 2022). The income statements for each business have been sent to FINACC LLP, and it is up to them to determine the projected return on investment for each. The company must additionally address any other pertinent concerns that could influence the choice of investments.

Analysis of Auto Wash Bot Ltd. Income Statement

For the fiscal year that concluded on December 31, 2015, Auto Wash Bot Ltd. reported total sales of $375,000. The price of the commodities that were sold came to a total of $86,250, which led to a gross profit of $288,750. The total amount that was spent on other expenditures for the firm was $293,150. These costs included advertising, research, office expenses, and workers and salaries (Farag, & Johan, 2021). This resulted in a revenue of $4,400 before taxes, which translated into a net income of $4,400. (4,400). The company’s negative net income is one of the factors that contribute to the overall poor financial performance of Auto Wash Bot Ltd.

This indicates that the firm is now running at a loss, since its operating expenditures are more than its income from operations at the moment. There is a possibility that the negative net income was caused in part by the high research costs, which totaled $195,000. The fact that the firm has just secured a large deal with a major maker of mobile devices may be an indication that the company is still in the beginning stages of its expansion and may not yet have created a robust client base. The gross profit margin is $288,750 / 375,000 = 77%.

Analysis of Popeye’s Muscle Wash Ltd Income Statement

For the fiscal year that concluded on December 31, 2015, Popeye’s Muscle Wash Ltd. had a total revenue of $375,000. The total amount of gross profit was $211,875, with the cost of goods sold coming in at $163,125. The total amount that was spent on other expenditures for the firm was $157,600. These expenses included advertising, office expenses, repairs and maintenance, as well as wages and compensation (Saona et al., 2020). This resulted in a gross income of $54,275 before taxes, which was reduced to a net income of $45,862 once taxes were taken into account. Positive results can be seen in Popeye’s Muscle Wash Ltd.’s financial performance, as seen by the company’s net income of $45,862. The organization has built a strong client base and has earned the loyalty and continued business of a significant number of people living in the immediate area (Lessambo, 2022). The costs of repairs and maintenance at the car wash, which totaled $85,000, are much more than the costs of research incurred by Auto Wash Bot Ltd. However, this may be attributable to the fact that the car wash is self-service and coin-operated. The gross profit margin is $211,875 / 375,000 = 56.5%.

Return on Investment

Using the company’s net income and the total amount invested, one is able to determine the predicted return on investment for both Auto Wash Bot Ltd. and Popeye’s Muscle Wash Ltd. Because Auto Wash Bot Ltd. now has a negative net income, the return that Big Spenders Inc. may anticipate to get on an investment of one hundred thousand dollars made in the firm would be negative. If Big Spenders Inc. were to make an investment of $100,000 in Popeye’s Muscle Wash Ltd., they might anticipate a return of $45,862 in the form of a return on their investment (Farag, & Johan, 2021). This amount represents the net income of the firm. Operating profit margin for Auto Wash Bolt Ltd is ($4,400) / $375,000 = (1.17%) while that of Popeye’s Muscle Wash Ltd is $54,275 / $375,000 = 14.5%.

Conclusion

Considering Auto Wash Bot Ltd. has a negative net income, the earnings risk associated with the company is larger than that associated with Popeye’s Muscle Wash Ltd. However, if Auto Wash Bot Ltd. is successful in growing its business and increasing profitability, there is a chance that the firm may be able to provide bigger returns in the future. On the other hand, Popeye’s Muscle Wash Ltd. has a stable client base and well-established business operations, making it a less hazardous investment choice than the other two options.

Recommendation

It has been determined via the research that Big Spenders Inc. would benefit from making an investment in Popeye’s Muscle Wash Ltd. In comparison to Auto Wash Bot Ltd., this business not only has a positive net income but also a reduced degree of earnings risk. In addition, the investment in Popeye’s Muscle Wash Ltd. will provide a return on investment of $45,862, which is the same amount as the company’s net income. Although Auto Wash Bot Ltd. may have the potential for better returns in the future, the company’s present negative net income and increased riskiness of profits make it a less attractive investment choice at this time.

References

Farag, H., & Johan, S. (2021). How alternative finance informs central themes in corporate finance. Journal of Corporate Finance, 67, 101879. Web.

Lessambo, F. I. (2022). Analysis of the statement of income. Financial Statements, 163-172. Web.

Saona, P., Muro, L., & Alvarado, M. (2020). How do the ownership structure and board of directors’ features impact earnings management? The Spanish case. Journal of International Financial Management & Accounting, 31(1), 98-133. Web.

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