Question

In: Finance

PLEASE SHOW WORK IN EXCEL THANK YOU! Green-Log Manufacturing Capital Budgeting Analysis In 1997 Michelle Green...

PLEASE SHOW WORK IN EXCEL THANK YOU!

Green-Log Manufacturing

Capital Budgeting Analysis

In 1997 Michelle Green started Green-Log Manufacturing, a company dedicated to manufacturing environmental friendly man made logs that can be burned in fire places, fire pits in the backyard, and when camping. The logs are made from environmental friendly products like cardboard and clean wax and emit fewer greenhouse gases and less harsh chemicals. The logs come in three pound and five pound sizes. Green-logs are also available with citronella to ward off mosquitos. The Green-Logs have been well received. Revenue and profits have grown steadily.

Based on the recommendation from her sales and marketing department Ms. Green is considering adding a new product line of Green-Log fire starters. These fire starters would be ideal for the outdoor market of camping, fishing, backpacking, and tailgating. Ms. Green has asked her sales and marketing team to come up with a sales forecast for units and pricing. She has also asked her manufacturing team to come up with alternatives for the production of the fire starters including what equipment is needed and what the projected costs would be.

The sales and marketing team hired Smith and Smith Consulting to conduct a market survey. The total cost for this consulting was $32,500. Based on the survey and their own experience the sales and marketing has provided a sales forecast. The suggested price of the fire starter is $2.50 per starter and they would be sold as a four pack for $10.00. The unit sales forecast is 20,000 4-packs in year 1, 45,000 in year 2, 60,000 in year 3, 75,000 in year 4, and then increasing by 5,000 each year thereafter. Sales and marketing expenses are expected to be 10% of total revenue.

The production team forecasts that the fixed costs needed for the fire starter production line will be $90,000 per year. Variable costs for materials (cardboard, wood shavings, wax, packaging, etc.) will be $0.85 per unit or $3.40 per four pack. The labor and maintenance costs will vary based on what equipment will be purchased.

There are two brands of equipment that will do the job; The ABC brand and the XYZ brand.

The ABC brand is more expensive, but higher quality and more efficient. It will cost $525,000 plus an additional $30,000 for shipping and installation. The equipment would be depreciated to zero over 5 years using straight line depreciation. It is expected that the equipment would last for 8 years and would be sold then for $55,000. Maintenance of the ABC equipment would cost $5,000 per year but every 3 years the equipment would need an overhaul that would increase the cost to $75,000 for that year. Since the ABC equipment is more efficient the variable labor cost would be $0.60 per four pack.

The XYZ brand is less expensive. It will cost $395,000 plus an additional $40,000 for shipping and installation. The equipment would be depreciated to zero over 5 years using straight line depreciation. It is expected that the equipment would last for 8 years and would be sold then for $35,000. Maintenance of the ABC equipment would cost $10,000 per year but every 3 years the equipment would need an overhaul that would increase the cost to $85,000 for that year. The variable labor cost with the XYZ brand equipment would be $0.80 per four pack.

The increase in working capital (accounts receivable and inventory) is expected to be $60,000 at the beginning of the project and will be the same for both machines. The company’s cost of capital is 14% and its tax rate is 40%. Since her production team believes that both brands of equipment will last for eight years Michelle wants this analyzed as an eight year project.

Michelle has always believed in buying quality so she is leaning towards the ABC brand equipment. But after hearing that you have learned about capital budgeting in your Finance class at UVU she wants to take advantage of your expertise. Michelle has asked you to analyze her choices and give her some advice on which option would provide the best financial outcome for Green-Log Manufacturing.

Prepare an analysis and professional report for Michelle. The report should be professionally written and include a two page letter, plus attached schedules. The letter should explain what analytical techniques you are using, why you are using those techniques, what the results show, what you would recommend to Michelle and why. Make sure that the letter is well organized and professionally written. Also make sure that the letter includes the following:

1.         The cash flows associated with the different equipment brands for each year of the           project.

2.         The PB period, Discounted PB, IRR, and NPV for the two alternatives.

3.         Your recommendation of which brand of equipment should be purchased.

4.         Attach to your letter schedules that show your analysis and your work.

            Please submit files. A Word file with your letter and an Excel file with your analysis.

Solutions

Expert Solution

  1. The cost incurred towards market survey of $32,500 is sunk cost and will not affect decision making relating to buying equipment XYZ or ABC.
  2. PB period - how many years it takes for cash flows to equal initial investment. FORMULA = initial investment + cash flows -
  3. Discounted PB - how many years it takes for discounted cash flows to equal initial investment. FORMULA = initial investment + discounted cash flows
  4. IRR - rate at which cash inflows = cash outflows FORMULA = use hit and trial method or in excel use =IRR(values of cash flows)
  5. NPV is the net present value or cash outflows + cash inflows FORMULA = sum total of all cash flows
  6. Table of analysis
ABC XYZ Remarks
Net present value                      697,263                      726,156 XYZ is more profitable than ABC. Hence, XYZ is preferable
rate at which cash outflows = cash inflows IRR 19.36% 23.63% XYZ will give a higher return than ABC. Hence, XYZ is preferable
payback period PBP (in years)                                   4                                   3 XYZ pays back earlier than ABC. Hence, XYZ is preferable
discounted payback period DPBP (in years) 4 years (approx) 4 years (approx) either XYZ or ABC

remarks
time in years
0 1 2 3 4 5 6 7 8
INITIAL INVESTMENT
395000+40000 -buying cost                   (435,000)
-increase in Working Capital                      (60,000)
TERMINAL CASH FLOWS
-salvage value of equipment           35,000
OPERATING CASH FLOWS
price                             2.50
pack price                                10                   10                    10                    10                    10                  10                  10                    10
units                        20,000          45,000           60,000           75,000           80,000          85,000          90,000           95,000
Revenue                      200,000        450,000         600,000         750,000         800,000       850,000       900,000         950,000
0.8 -variable cost                      (16,000)        (36,000)         (48,000)         (60,000)         (64,000)       (68,000)       (72,000)         (76,000)
Contribution                      184,000        414,000         552,000         690,000         736,000       782,000       828,000         874,000
-fixed cost                      (90,000)        (90,000)         (90,000)         (90,000)         (90,000)       (90,000)       (90,000)         (90,000)
Gross Profit                        94,000        324,000         462,000         600,000         646,000       692,000       738,000         784,000
@10% of revenue -sales & marketing expense                      (20,000)        (45,000)         (60,000)         (75,000)         (80,000)       (85,000)       (90,000)         (95,000)
overhaul after every 3 years. Hence, at T=4 and T=8 -labour & maintenance cost                      (10,000)        (10,000)         (10,000)         (85,000)         (10,000)       (10,000)       (10,000)         (85,000)
EBITDA                        64,000        269,000         392,000         440,000         556,000       597,000       638,000         604,000
SLM method, 0% salvage value -depreciation                      (87,000)        (87,000)         (87,000)         (87,000)         (87,000)                   -                     -                       -  
EBIT                      (23,000)        182,000         305,000         353,000         469,000       597,000       638,000         604,000
nil - interest 0                    -                       -                       -                       -                     -                     -                       -  
PBT                      (23,000)        182,000         305,000         353,000         469,000       597,000       638,000         604,000
@40% -tax                          9,200        (72,800)       (122,000)       (141,200)       (187,600)     (238,800)     (255,200)       (241,600)
PAT                      (13,800)        109,200         183,000         211,800         281,400       358,200       382,800         362,400
-added back because it’s a non-cash expenditure -+depreciation                        87,000          87,000           87,000           87,000           87,000                   -                     -                       -  
AFTER TAX CASH FLOW                   (495,000)                        73,200        196,200         270,000         298,800         368,400       358,200       382,800         397,400
CUMULATIVE CASH FLOWS                   (495,000)                   (421,800)      (225,600)           44,400         343,200         711,600    1,069,800    1,452,600     1,850,000
discounted @14%
formula:-

cash flow/(1+discount rate)^time
14%                   (495,000)                        64,211        150,970         182,242         176,914         191,335       163,191       152,981         139,312
CUMULATIVE DISCOUNTED CFs                   (495,000)                   (430,789)      (279,820)         (97,578)           79,336         270,671       433,862       586,844         726,156
NET PRESENT VALUE                      726,156
IRR 23.63%

Related Solutions

In 1997 Michelle Green started Green-Log Manufacturing, a company dedicated to manufacturing environmental friendly man made...
In 1997 Michelle Green started Green-Log Manufacturing, a company dedicated to manufacturing environmental friendly man made logs that can be burned in fire places, fire pits in the backyard, and when camping. The logs are made from environmental friendly products like cardboard and clean wax and emit fewer greenhouse gases and less harsh chemicals. The logs come in three pound and five pound sizes. Green-logs are also available with citronella to ward off mosquitos. The Green-Logs have been well received....
In 1997 Michelle Green started Green-Log Manufacturing, a company dedicated to manufacturing environmental friendly man made...
In 1997 Michelle Green started Green-Log Manufacturing, a company dedicated to manufacturing environmental friendly man made logs that can be burned in fire places, fire pits in the backyard, and when camping. The logs are made from environmental friendly products like cardboard and clean wax and emit fewer greenhouse gases and less harsh chemicals. The logs come in three pound and five pound sizes. Green-logs are also available with citronella to ward off mosquitos. The Green-Logs have been well received....
Please solve A, B, and C. Please use excel. Please show work. Thank you. A. Use...
Please solve A, B, and C. Please use excel. Please show work. Thank you. A. Use the stocks of Apple, SAP, IBM, Oracle, and Amazon Download the historical data of weekly stock prices and S&P 500 index prices from year 2017-2019 on the website of yahoo finance and save it on an excel file. B. Use a different sheet to save the market adjusted prices of Apple, SAP, IBM, Oracle, and Amazon t and the index. For each stock, compute...
Please show work step by step, NO EXCEL. Thank you! The investment is $1,000,000, which is...
Please show work step by step, NO EXCEL. Thank you! The investment is $1,000,000, which is depreciated straight line to a zero salvage value over a 10 year life. The asset will be worthless in 10 years. The project will generate, annually, revenues of $800,000, cash operating expenses of $500,000, and depreciation of $100,000. The tax rate is 30%, and the cost of capital is 10%. a. what are the annual cash flow and the NPV? b. what would be...
Please use Excel and show the formula you used. Thank you :) A manufacturing process produces...
Please use Excel and show the formula you used. Thank you :) A manufacturing process produces connecting rods whose diameter is normally distributed with mean 1.495 cm and standard deviation .05 cm. In what range will the “middle 80%” of the diameters lie? What about the “middle 98%”?
Signature Assignment - Capital Budgeting Course Project Work must be done in Excel. Please show formulas...
Signature Assignment - Capital Budgeting Course Project Work must be done in Excel. Please show formulas if possible so I can get a true understanding of the deliverables. You have recently assumed the role of CFO at your company. The company's CEO is looking to expand its operations by investing in new property, plant, and equipment. You are asked to do some capital budgeting analysis that will determine whether the company should invest in these new plant assets. Signature Assignment...
Please solve in Excel and show your work. Thank you. Calculate the value of Apples’ stocks...
Please solve in Excel and show your work. Thank you. Calculate the value of Apples’ stocks given These following inputs are from Yahoo finance to see how close the model will match the current mkt price. These are 2019 figures: FCF’s = 60 billion             growth= 5%               wacc = 7.5%         Treasury securities = 51 billion     debt = 92 billion            #shares= 4.6 billion Assume the growth rate listed is for the first 4 years and then FCF’s will grow at 3.5% thereafter....
Please show work step by step, and no Excel. Thank you! Fei Meng, Incorporated has a...
Please show work step by step, and no Excel. Thank you! Fei Meng, Incorporated has a project with the after-tax cash flows shown below. The required return (cost of capital) on the investment is 10%. Compute the:             Year 0 1 2 3 4 Cash flow -70,000 30,000 30,000 30,000 20,000 Payback Discounted payback NPV Profitability index IRR MIRR
Please show your work and formula on excel sheet. Thank you. Assume you borrow $8,000,000 with...
Please show your work and formula on excel sheet. Thank you. Assume you borrow $8,000,000 with a coupon rate of 8% from a bank as a mortgage against your newly renovated plant. The loan is paid off in 7 years. You will pay an equal amount every year until the loan is fully paid off. What are the interest and principal payments for each year of the loan.
Please show work step by step, no excel. Thank you! The three alternative projects shown below...
Please show work step by step, no excel. Thank you! The three alternative projects shown below have the expected cash flows that are given, and the cost of capital is 10%. Calculate the paybacks for all three projects. Rank the projects from best to worst based on their paybacks. Calculate the NPVs for all three projects. Rank the projects from best to worst based on their NPVs. Why are these two sets of rankings different? year 0 1 2 3...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT