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Homework answers / question archive / Subject: Cash Flow Analysis     Analyze the case study, "Frank Smith Plumbing

Subject: Cash Flow Analysis     Analyze the case study, "Frank Smith Plumbing


Subject: Cash Flow Analysis

Analyze the case study, "Frank Smith Plumbing."

Analyze the "Frank Smith Plumbing's Financial Statement" spreadsheet.

Compare the cost of the truck to the cash flow records

Compile your calculations in a Microsoft® Excel® document

Develop a 800-word analysis and include the following:

  • Explain why limited leverage is good for business.Show the profitability of the project so that Stephanie can convince her father to purchase the truck by borrowing money.
  • Explain how Stephanie should convince her mother that it is inappropriate to call the bank manager and his wife for assistance in getting the loan approval?
  • Analyze whether the investment in the truck is profitable.
  • Explain whether it is more beneficial for Frank to close his business.
  • Explain what you would do in this same situation.

Format your assignment consistent with APA guidelines. 

Click the Assignment Files tab to submit your assignments.


Limited leverage is good for the organization. Frank Smith has considerable experience and good client base in the location. It is providing more advantage to Frank Smith for approaching the bank. Taking loan has the benefit to the business (Nolo, 2007). Interest is paid on the amount of loan borrowed from the business. Banker will require more information about the business and their future only before the sanctioning loan.

                Frank Smith should make a regular payment towards the loan even without missing one installment. The lender will not interfere in any of the business decisions made by the business. There will be no interference by the banker into the business. Frank Smith will have the same independence how he had before obtaining the loan from the bank. The lender will not have any share of the profits generated by the company. There will be no transfer of the ownership of the business to the bank.

                Similarly, it will reduce the burden of required capital to be invested in the company (Nolo, 2007). Interest payment made towards the loan will provide a tax benefit to the business. It will reduce the overall tax burden to the business, and it will increase the overall profitability of the business. Limited liability will reduce the burden of initial investment requirement of Frank Smith. It will not create any delay in beginning the business. It will provide more time to Frank Smith for repaying the loan. It will create a good credit record for Frank Smith that will be beneficial for his future business expansion.

                Stephanie is correct that it is unethical for Elena calling the wife of a bank manager to grant the loan to her father without providing the required financial information and business details. Every business especially in the finance industry. In this case, without making an evaluation about the business of Frank Smith and the cash generating capacity of the business, the banker should not process the loan as it might result in creating more trouble for loan repayment and trouble to the bank (Gerald & Patricia, n.d.). Making use of undue influence to get a loan will result in unethical behavior.

                Stephanie should explain to her mother that by making a call to manager’s wife, it will create an impression that they are creating an obligation to sanction the loan. It will provide an opportunity to think that their financial condition of the business is not appreciable and they are desperate to get the loan to repay. It will create a situation where they might be forced to act unethical that is against the business rules and obligations.

                Applying through standard procedure and asking for assistance in applying for the loan in a legitimate manner will not create any obligation to either party and it will ensure that father’s business is capable of getting loan. A loan should be obtained using the strength of the business, and it should be ethical and legitimate. If incase the bank manager gets transferred and a new manager being appointed to the position and challenging the loan provided to the business, then it will create more trouble for the business. Therefore, the process should be made as per the requirement to avoid any hazel in future.

                From the analysis, it is clear that making an investment in the truck is profitable. Capital budgeting analysis is performed to analyze whether it would be appropriate to make an investment or not. From the payback period, it is evident that it takes only 2.15 years to generate the amount of investment. The discounted payback period is about2.75 years that are significantly lesser. The amount that is generated post payback period will be profit to Frank Smith. The net present value indicates the cash flow is generating a capacity of the business. Net present value takes time value of money into consideration, and it provides appropriate indication whether a project will generate benefit (cash inflow) or loss (cash outflow) (FAO, n.d.).

                The net present value is $131,825.65 that is greater than zero and positive indicating that purchasing truck will be beneficial for Frank Smith. It shows that the project will generate a cash inflow of $131,825.65 as profit for the amount of investment made. IRR is 33.05% that is greater than the cost of capital. As per IRR decision rule, a project can be selected if its IRR is greater than the cost of capital. In this case, a project can be accepted as IRR is greater than 12% the cost of capital (FAO, n.d.). Profitability index is at 1.61 that is higher than one indicating that this project is profitable and can be selected. Thus, from the capital budgeting analysis, it is clear that purchasing truck will be beneficial.

                Frank Smith should not close the business without making use of other available alternatives. From the capital budgeting analysis, it is clear the future prospect of the business is good, and it will be profitable for Frank Smith to purchase the truck. It indicates that the business has more growth potential. In this case, closing the business will not wise and appropriate. Business should be shut only if the demand for the product is obsolete or there is no option for upgrading the product etc. In this case, there is more opportunity for growth, and hence, business should not be shut.

                If I had been in the position of Frank Smith, I would have prepared the financial projection related to the purchase of the new truck, historical financial information about the business and a detailed business plan. It will enable me to present my ideas to the bank for seeking a loan from the bank to meet my financial business requirement. There are more crowdfunding available in the market. After making all primary requirements, I would have approached the crowdfunding for raising the required amount if the bank loan is not feasible. Raising bank loan will not create any interference with my business independence and will not have any claim to the ownership unlike other sources of funding.

                With the financials prepared I am sure that I will get bank loan easily as the venture is profitable and provides the higher ability for generating cash that is essential to repay the loan. If a bank loan is not available, I will approach either crowd or venture funding at small scale for purchasing the truck. I will look out for alternatives to raise funds to grow the business and ensure that my business grows and is successful.







FAO. (n.d.). Chapter 6 - Investment decisions - Capital budgeting. Retrieved from


Gerald, K. P., & Patricia, S. K. (n.d.). "What Should I Do?" - Ethical Risks, Making Decisions, and Taking Action - by Gerald P. Koocher, Ph.D. and Patricia Keith-Spiegel, Ph.D. Retrieved       from     


Nolo. (2007, January 5). Financing A Small Business: Equity Or Debt? Retrieved from



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