The Rustic Welt Company is considering launching a new product. The new equipment costs $9 million and falls under straight line depreciation. The depreciation rate will be 10% each year for the next 10 years. The sale price is $8 per welt. The variable costs is a welt to $4 per welt. However, as the following table shows, there is some uncertainty about both the future number of unit sold:

a. calculate the NPV for the expected case

b. Conduct a sensitivity analysis assuming a discount rate of 12%. Rustic does not pay taxes and there is no change in NWC.

CASE STUDY

New Logistics Manager

Marcelo is the new logistics manager at BelAir LLC, a U.S. manufacturing company based in the state of Georgia (U.S.A). It provides abrasive surface preparation and spray painting equipment. The company recently started selling equipment in Sri Lanka.

An International Customer Complains

To date, BelAir’s only customer in Sri Lanka is SnapGear. SnapGear’s president, Dhruv Kumar, complained that products have not been delivered on time. Dhruv was told in January that it would take four weeks to have all the ordered products delivered to Sri Lanka, but it is now March and he has only received some of the equipment. He also noted that he had ordered electric motors that were urgently needed for a client, but they have not yet arrived, despite his flagging the order to the previous logistics manager. Dhruv has also been waiting on BelAir to send a signed statement certifying the country of origin of the products and that the products were in accordance with the invoice. Dhruv advised Marcelo that if BelAir did not fix its problems immediately, SnapGear would begin using a Miami-based company that had recently approached him.

Marcelo Investigates

Marcelo began investigating what type of equipment was being shipped and where the bottleneck was. He reviewed the purchase order and saw that SnapGear had ordered storage and blast cabinets, vacuum equipment and a few smaller items including the electric motors. With this information, he would determine how the products were sent from the warehouse and then try to track the exact location of the products on their way to Sri Lanka.

Status of Loading and Transport from BelAir

In March, BelAir started to use the budget U.S. carrier Tempo Logistics to transport larger products from the warehouse to the shipping port in Charleston, South Carolina. The owners of Tempo and BelAir were good friends. The companies had negotiated a new two-year agreement in early March. Marcelo searched through emails and files, but couldn’t find the contract from Tempo Logistics. He had no idea what the carrier was supposed to do. He contacted Tempo to get further details about the services it offered BelAir, but was unable to reach anyone there. Marcelo then went to the warehouse to speak with Gary, the shipping manager, about the products shipped to SnapGear – particularly the electric motors. He was surprised when Gary told him, “We thought that the electric motors could go with the rest of the equipment, so we packed them in the ocean container, too. You know, it might save us some money. We ran out of filling material, but don’t worry—we packed it in a way that nothing will happen to them.” Marcelo knew that some of the larger equipment had protruding parts, so he became concerned the smaller items would be damaged en route. Marcelo also realised that the blasting cabinet that SnapGear had ordered was still in the warehouse. Gary said the light box component had to be removed from the top of the blast cabinet in order to meet the ocean container height regulations, and his staff needed the company’s engineer to help make the modification before the shipment could proceed. SnapGear was also waiting on the vacuum equipment, which was found next to the blasting cabinet in the warehouse. Gary and his staff had never sent vacuum equipment by sea, and they needed a forty-foot container with an open top. Someone had ordered a hard top container instead. If the open-top container was not used, the container could not be loaded by crane onto the cargo ship. Marcelo thought to himself, “How did we not know this before?” After Marcelo finished speaking with Gary, he went back to the office and received a call from Bryan at Tempo Logistics. Bryan advised that there was a verbal contract between Tempo and BelAir; a written contract was still being prepared. He also said Tempo was experiencing a shortage of truck drivers and could not come for another four to five days to take containers to the port. Bryan added that Marcelo would be very fortunate to find a company able to assist in trucking, as finding new truck drivers to replace those retiring had become a nationwide problem. Marcelo had to find a solution to this, as he needed to get equipment moved not only internationally, but in the U.S. as well.

CORRECTIVE ACTION

Marcelo called the freight forwarders that BelAir used, ABC Global Express, which offered a full range of services, such as export packing and containerization. To save costs, BelAir did not use ABC’s U.S. pick-up service or any other packaged services. It used ABC as shipping agents and customs brokers to arrange the export customs clearance and to pay the export duties. Marcelo was used to working with freight forwarders who offered door-to-door service, so this would be an adjustment. However, ABC did offer satellite tracking, so Marcelo used his smartphone to track BelAir’s latest shipment to SnapGear through the mobile application. To Marcelo’s disappointment, the latest shipment was in Sri Lanka, but delayed due to customs clearance issues. At the seaport in Colombo, Sri Lanka, goods are unloaded from the ship and then inspected by customs and stored. The consignee has four days to provide the required documents needed for customs clearance and then remove the goods from the storage area. Dhruv has been waiting for a missing document from BelAir to be able to provide the complete set of documents to Sri Lankan customs. The demurrage has been accumulating for the past two weeks. Dhruv knew that the sales agreement with BelAir stated that SnapGear was responsible for charges once the shipment arrived in Sri Lanka, but as he believed the missing documentation was BelAir’s fault, he wanted BelAir to pay for the demurrage. As a part of the sales contract between BelAir and SnapGear, they negotiated the following shipping delivery terms: “CFR, Port of Colombo, Sri Lanka, Incoterms® 2020.” SnapGear had a solid relationship with its own freight forwarders, located in Sri Lanka, and were able to negotiate favourable freight rates. Keeping this in mind, BelAir had already offered SnapGear a reduced price for the equipment that it shipped. Marcelo called Dhruv to explain the situation, and that he would be getting all the outstanding equipment shipped, just as soon as possible. He prepared the signed statement – which certified the country of origin – and sent it by email to Dhruv, hoping the Sri Lankan customs authorities would accept it while waiting for the original document to arrive by courier in three days. Marcelo also offered to pay for the extra demurrage incurred. Dhruv was still not happy with the service offered by BelAir. He told Marcelo he would not be purchasing equipment from BelAir again.

QUESTION

1. Discuss which shipping mode(s) would be most cost-effective for BelAir in shipping from the USA to Sri Lanka?

2. Discuss which shipping mode(s) would be most cost-effective for BelAir in shipping inside the USA

Carol plans to establish a new laundry. Prior to establishing her new business, she understood that she needs to conduct a market test. The cost of this test marketing is $ 65,000. The potential market is quite good at least for the next five years. That's why she is considering investing in a new machine for her new business of $ 450,000. She estimated that the depreciation will be $ 45,000 annually. by the end of project the machine can be sold again for $ 125,000 after tax. The machine is estimated to save $ 130,000 cost of capital pre-tax annually. The new product will cost around 35 percent of the sales, and the expected sales in the first year will be around $ 99,000 and will increase 25 percent annually. Carol has an empty building that can be used to do her new business. The building actually can be sold for $ 115.000 after tax. She considers that she needs an initial $ 55,000 as an initial net working capital. The net working capital at the end of each year will be equal to 20 percent of sales for that year. She considers that her current selling and the general cost are $ 32,000 and it will increase 13 percent annually due to inflation and government regulation. The tax rate is 21 percent and the discount rate is 12 percent. Based on her marketing test, she believes that the sales of a new product will increase by around 25 percent annually. However, the introduction of new business products will reduce the existing product for 20 percent.

a) How is the proposed new project analysis? Use Excel and please provide the formula or calculation so I can apply it to my task.

The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $1.67 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The company believes that it can sell 27,000 tents per year at a price of $71 and variable costs of $31 per tent. The fixed costs will be $465,000 per year. The project will require an initial investment in net working capital of $221,000 that will be recovered at the end of the project. The required rate of return is 11.4 percent and the tax rate is 40 percent. What is the NPV? show work on excel sheet .

NEW PROJECT ANALYSIS

You must evaluate a proposal to buy a new milling machine. The base price is $153,000, and shipping and installation costs would add another $7,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $68,850. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $3,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $35,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1. How should the $5,000 spent last year be handled?
   1. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   2. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.
   3. The cost of research is an incremental cash flow and should be included in the analysis.
   4. Only the tax effect of the research expenses should be included in the analysis.
   5. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.
   
   -Select-IIIIIIIVVItem 1

2. What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
   $

3. What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

   Year 1 $

   Year 2 $

   Year 3 $

4. Should the machine be purchased?
   -Select-YesNo

Creative Ideas Company has decided to introduce a new product. The new product can be manufactured by either a capital-intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows.

Capital- Intensive:

Direct materials $5 per unit

Direct labor $6 per unit

Variable overhead $3 per unit

Fixed manufacturing costs $2,524,000

Labor- Intensive:

Direct materials $5.50 per unit

Direct labor $8.00 per unit

Variable overhead $4.50 per unit

Fixed manufacturing costs $1,550,000.

Creative Ideas’ market research department has recommended an introductory unit sales price of $32. The incremental selling expenses are estimated to be $502,000 annually plus $2 for each unit sold, regardless of manufacturing method. Assume that the annual unit sales volume at which Creative Ideas would be indifferent between the two manufacturing models is 243,500 units. Explain the circumstance under which Creative Ideas should employ each of the two manufacturing methods.

CASE BACKGROUND

New Logistics Manager
Marcelo is the new logistics manager at BelAir LLC, a U.S. manufacturing company based in the state of Georgia (U.S.A). It provides abrasive surface preparation and spray painting equipment. The company recently started selling equipment in Sri Lanka.
An International Customer Complains
To date, BelAir’s only customer in Sri Lanka is SnapGear. SnapGear’s president, Dhruv Kumar, complained that products have not been delivered on time. Dhruv was told in January that it would take four weeks to have all the ordered products delivered to Sri Lanka, but it is now March and he has only received some of the equipment. He also noted that he had ordered electric motors that were urgently needed for a client, but they have not yet arrived, despite his flagging the order to the previous logistics manager. Dhruv has also been waiting on BelAir to send a signed statement certifying the country of origin of the products and that the products were in accordance with the invoice. Dhruv advised Marcelo that if BelAir did not fix its problems immediately, SnapGear would begin using a Miami-based company that had recently approached him.
Marcelo Investigates
Marcelo began investigating what type of equipment was being shipped and where the bottleneck was. He reviewed the purchase order and saw that SnapGear had ordered storage and blast cabinets, vacuum equipment and a few smaller items including the electric motors. With this information, he would determine how the products were sent from the warehouse and then try to track the exact location of the products on their way to Sri Lanka.

Status of Loading and Transport from BelAir
In March, BelAir started to use the budget U.S. carrier Tempo Logistics to transport larger products from the warehouse to the shipping port in Charleston, South Carolina. The owners of Tempo and BelAir were good friends. The companies had negotiated a new two-year agreement in early March. Marcelo searched through emails and files, but couldn’t find the contract from Tempo Logistics. He had no idea what the carrier was supposed to do. He contacted Tempo to get further details about the services it offered BelAir, but was unable to reach anyone there.
Marcelo then went to the warehouse to speak with Gary, the shipping manager, about the products shipped to SnapGear – particularly the electric motors. He was surprised when Gary told him, “We thought that the electric motors could go with the rest of the equipment, so we packed them in the ocean container, too. You know, it might save us some money. We ran out of filling material, but don’t worry—we packed it in a way that nothing will happen to them.” Marcelo knew that some of the larger equipment had protruding parts, so he became concerned the smaller items would be damaged en route.
Marcelo also realised that the blasting cabinet that SnapGear had ordered was still in the warehouse. Gary said the light box component had to be removed from the top of the blast cabinet in order to meet the ocean container height regulations, and his staff needed the company’s engineer to help make the modification before the shipment could proceed. SnapGear was also waiting on the vacuum equipment, which was found next to the blasting cabinet in the warehouse. Gary and his staff had never sent vacuum equipment by sea, and they needed a forty-foot container with an open top. Someone had ordered a hard top container instead. If the open-top container was not used, the container could not be loaded by crane onto the cargo ship. Marcelo thought to himself, “How did we not know this before?”
After Marcelo finished speaking with Gary, he went back to the office and received a call from Bryan at Tempo Logistics. Bryan advised that there was a verbal contract between Tempo and BelAir; a written contract was still being prepared. He also said Tempo was experiencing a shortage of truck drivers and could not come for another four to five days to take containers to the port. Bryan added that Marcelo would be very fortunate to find a company able to assist in trucking, as finding new truck drivers to replace those retiring had become a nationwide problem. Marcelo had to find a solution to this, as he needed to get equipment moved not only internationally, but in the U.S. as well.

CORRECTIVE ACTION
Marcelo called the freight forwarders that BelAir used, ABC Global Express, which offered a full range of services, such as export packing and containerization. To save costs, BelAir did not use ABC’s U.S. pick-up service or any other packaged services. It used ABC as shipping agents and customs brokers to arrange the export customs clearance and to pay the export duties. Marcelo was used to working with freight forwarders who offered door-to-door service, so this would be an adjustment. However, ABC did offer satellite tracking, so Marcelo used his smartphone to track BelAir’s latest shipment to SnapGear through the mobile application. To Marcelo’s disappointment, the latest shipment was in Sri Lanka, but delayed due to customs clearance issues.
At the seaport in Colombo, Sri Lanka, goods are unloaded from the ship and then inspected by customs and stored. The consignee has four days to provide the required documents needed for customs clearance and then remove the goods from the storage area. Dhruv has been waiting for a missing document from BelAir to be able to provide the complete set of documents to Sri Lankan customs. The demurrage has been accumulating for the past two weeks.
Dhruv knew that the sales agreement with BelAir stated that SnapGear was responsible for charges once the shipment arrived in Sri Lanka, but as he believed the missing documentation was BelAir’s fault, he wanted BelAir to pay for the demurrage. As a part of the sales contract between BelAir and SnapGear, they negotiated the following shipping delivery terms: “CFR, Port of Colombo, Sri Lanka, Incoterms® 2020.” SnapGear had a solid relationship with its own freight forwarders, located in Sri Lanka, and were able to negotiate favourable freight rates. Keeping this in mind, BelAir had already offered SnapGear a reduced price for the equipment that it shipped.
Marcelo called Dhruv to explain the situation, and that he would be getting all the outstanding equipment shipped, just as soon as possible. He prepared the signed statement – which certified the country of origin – and sent it by email to Dhruv, hoping the Sri Lankan customs authorities would accept it while waiting for the original document to arrive by courier in three days. Marcelo also offered to pay for the extra demurrage incurred. Dhruv was still not happy with the service offered by BelAir. He told Marcelo he would not be purchasing equipment from BelAir again.

QUESTIONS

1. Identify, evaluate, and then describe six challenges faced by Marcelo with the shipping of products to SnapGear in Sri Lanka.

2. Explain clearly two ways that the truck driver shortage may affect BelAir and freight-forwarding companies generally?

The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $1.67 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 10 percent of its initial cost. The company believes that it can sell 27,000 tents per year at a price of $71 and variable costs of $31 per tent. The fixed costs will be $465,000 per year. The project will require an initial investment in net working capital of $221,000 that will be recovered at the end of the project. The required rate of return is 11.4 percent and the tax rate is 40 percent. What is the NPV? explain on excel sheet .

An electric utility company is considering a new power plant in northern New Mexico. Electricity generated at the plant would be sold in the Albuquerque market where it is badly needed. The firm has the possibility of building a plant that will meet their production needs for the next several years that will cost $300 M. They also have the option of building a larger facility that will have a higher production capacity and will allow them to sell some excess power to another utility company under a long-term contract. The larger facility will cost $600M. The anticipated cash flows for each plant are as follows:

At the end of ten years, both facilities will need significant upgrades and the company plans to conduct further analysis at that time. The risk adjusted cost of capital for this project is 12 percent.

1. Choose a course of action for the company and justify your decision for the managers of the company.

NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $181,000, and shipping and installation costs would add another $8,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $126,700. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $8,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $56,000 per year. The marginal tax rate is 35%, and the WACC is 10%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine. How should the $5,000 spent last year be handled? Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. Last year's expenditure is considered as an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. Last year's expenditure is considered as a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis. The cost of research is an incremental cash flow and should be included in the analysis. Only the tax effect of the research expenses should be included in the analysis.

What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.

_______$

What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent. Do not round your intermediate calculations.

Year 1 _____$

Year 2 ______$

Year 3 ______$

Should the machine be purchased? Yes or No