United Metals Case Study
First of all, we have some information useful for both of the projects:
* This is an 8-year project * We will currently position ourselves in Year 1 (Y1) * The annual output is …show more content…
Same as for the “make” decision, but the cost will occur a year earlier (Y3).
The selling of the machine will induce an inflow of $5,000. However, it will also be the cause of a loss of $35,000. Indeed, in Y1, the book value of the machine is 45,000-5,000= $40,000 and we will only make a $5,000 profit.
This loss is tax deductible:
Buying the components implies buying a new machine costing $8,000. This new acquisition is depreciated over 4 years and is tax deductible:
Return of Working Capital
In Y1 we will have to return the equivalent of 2 weeks finished goods and raw materials from the old working capital. According to what we already computed for the “make” decision, this adds up to $5,000.
Also, Amalgamated Components only delivers batches of 30,000, therefore at the end of the project we will have to return 15,000 items that were in stocks:
The annual present value of each cash flow (here the discount rate is 12%)
Year | Y0 | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | Manufacturing Costs | | -53.95+0.65 | -53.95+0.65 | -53.95+0.65 | -53.95+0.65 | -53.95+0.65 | -53.95+0.65 | -53.95+0.65 | -53.95+0.65 | Warehouse | | | | -50 | | | | | | Machinery | -45 | +5-8 | | | | | | | | Return of Working Capital | +5 | | | | | | | |