THE FIRM Mark Rubin had no intentions of starting his own firm in 1972. Since graduating from college in 1964, he had worked for ML Pipe, a company based in Youngstown, Ohio. In January 1972, the company decided to relocate to New Jersey, and Rubin went also. Rubin and his wife were quite unhappy in Virginia, mainly because they felt …show more content…
For the purpose of analysis, Rubin will assume straight-line depreciation to zero salvage value over the eight-year life of the project. (Ideally, you should use MACRS depreciation). The market value of the equipment after eight years is expected to be $180,000 before taxes.
THE ACCOUNTANT’S ESTIMATES
The firm’s accountant, Abe Komansky, has developed a set of numbers that, in his view, “strongly indicates” in-house production is a “losing proposition.” (See Exhibit 2.) Komansky estimates it will cost 54.3 cents per pound to produce the 10-inch and 12-inch pipe internally. He notes that GLPT can purchase the same pipe for 45 cents per pound from another manufacturer and incurs another 2 cents per pound to get the pipe to GLPT’s customers. Thus, Komansky argues, internal production results in an 7.3 cent per pound loss, or $87,600 per year assuming 1.2 million pounds of pipe.
As Rubin scans these figures, he smiles as he notices that Komansky used Rubin’s sales estimates and annual sales probabilities. He wonders, though, how accurate the accountant’s numbers really are. For one thing, the estimates are based on the “most likely” sales figure and do not consider the other sales possibilities. In addition, Rubin questions the appropriateness of including depreciation, given that it is a non-cash item. For these and other reasons, he decides to rethink the figures the