Flash Memory, Inc

Flash Memory Inc. Case Study

Executive Summary

Flash Memory Inc. is a competitive entry in the solid-state memory market, designing and manufacturing Solid State Drives and memory modules. Flash Memory’s CFO has recently been approached with a proposal for a major new product line, which would positively impact the company’s revenues and cash flows over the next three years.

An analysis based on the expected financing and earnings and the current financial state of the company was conducted to determine the financial viability of proceeding with this new venture. The new product line is expected to have a positive Net Present Value of $6.08 million and an Internal Rate of Return of 36%. Although the new project must be financed at a higher interest rate, Flash Memory Inc. can use earnings from its high projected sales to partially finance the required working capital. The expected resultant changes to the company cash flows at the end of the third product year consist of:

* 19% increase in net sales

* 33% increase in net income

* 19% increase in assets

* 74% increase in retained earnings

* 11% increase in earnings per share

Flash Memory Inc.’s pro forma income statements and balance sheets for 2010 through 2012 indicate that the company cannot finance its growth with short-term loans at a 7.25% (4% plus 3.25% prime rate) interest rate (Appendices 1 & 2). Assuming that Flash Memory Inc. continues to finance its growth with external short-term debt, the projected 2010 notes payable totals $14.176MM. This amount is $0.367MM above the current lending agreement of 70% of the accounts receivable balance. The 2011 projections also indicate that the required notes payable will exceed $16.784MM, $0.214MM above the 70% of accounts receivable threshold. Even though these amounts are considerably close to the limit, the loan officer indicates that the only way to finance this additional amount is to increase the interest rate from...