Analysis on the replacement of Sheeter
The replacement of the sheeter is discussed due to the intention of Carded Graphics for increasing the capacity, lowering the variable costs and lowering the wastage costs associated with old sheeter.
For this purpose, the Carded Graphics has worked out with the possible future savings as a result of upgrading of sheeter, these include the savings in the variable costs excluding the labor, savings as a result of reduction in savings other possible savings which are not mentioned in the case scenario may be, savings in electricity expense, savings in the labor costs as the new machine may require less supervision and less labor on it.
The upgrading of the new sheeter will not only result in savings to the Carded Graphics but it will also incur some extra costs to the company.These costs include the extra overhead fee as the new machine would take up more space than the old sheeter. Other costs not mentioned may be training cost on the labor to make them able to run the machine and other setup costs, which relate to the alteration in the system for new equipment. On the other hand, the price of the new sheeter in the market is $700000 and its residual value after eight years is projected as $120000 by the Carded Graphics.
Mr. Murry Pitts has decided to make the investment appraisal of the equipment by employing the traditional method of net present value by using appropriate discounting factor by using the financial information of comparable companies. The discounted rate of 6% has been calculated on the basis of the information of the comparable company International Packaging. Calculations can be seen in exhibit#2.
NPV is calculated by deducting the costs from the savings of the new equipment, all must be incremental, this means directly related to the new equipment.For this calculation we have assumed the tax rate of 30% and the growth in the savings of 3% per annum, the NPV of the new sheeter is calculated $40,330, the calculations can be seen in the exhibit#1 (Afonso, 2009).
The installation of the new sheeter will result costs savings to the Carded Graphics the details are as follows:
- Variable cost savings are projected to be about $11 per ton and by multiplying them with daily production in tons and the days in a year, the figure will be about $147,606 per annum
- Savings due to the lesser wastage in the new machine are accounted for about $16000 per annum
- Finally, the disposal proceeds are accounted as positive cash inflows at the expiry of the new sheeter, the sale value of $120000 is given in the case study.
Carded Graphics, Llc Sheeter Replacement Decision Case Solution
It is recommended that Carded Graphics should go for the acquisition of the new sheeter.There a son is that the company will benefit from extra production and increase in the capacity.Secondly, the wastage and variable costs of new machine will be lesser than the old machine, which will resultin savings to the company and finally, the investment appraisal has also shown positive NPV, which makes the investment favorable to the Carded Graphics (Hoang, 2008).......................
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Carded Graphics, Llc: Sheeter Replacement Decision
Group 3FIN 4596Sec: 00410/19/2014
The ris' free rate is the 80 year Government 9ond 23%6:45 because it is the closest matching time frame of our pro;ect$ and the mar'et ris' premium is <4% To calculate the W=CC #e first calculated the average beta of the industry because no company has similar assets to Carded Graphics$ and also the average debt and average e+uity of all the companies in the industry%
sho#s ho# #e used all of our assumptions and calculated the W=CC% Pitts has t#o options, >ne he can refurbish the old sheeter$ e.tending its useful life another 7 years? or t#o replace the old sheeter #ith a ne# one that #ill have a useful life of 7 years% =n *P- analysis of refurbishing the old machine using the W=CC #e calculated in the previous paragraph resulted in a value of @/$670$A/<%/< 2B.hibit 85% The *P- analysis of replacing the old sheeter resulted in the value of @3$A/0$06< 2B.hibit /5%=fter analying both pro;ects$ the best decision for Pitts is to replace the old sheeter because it produces a higher *P-% This investment #ill increase efficiency and have a positive effect on operations in the long!term% Carded Graphics& ne# sheeter #ill give them a competitiveedge in producing products and help them compete in the paper industry% Ta'ing into account thesensitivity of W=CC and the increased use of roll paper 2important inputs5$ #e find that even #ith a number of different factors$ this policy is still favorable 2B.hibits 3 and A5%>verall$ #e are pleased to announce the numbers bac' up Pitts& inhibition$ and that he should pursue the ne# sheeter$ based on the benefits of e.panded capacity and cost reduction% This is sho#n by the *P- calculations and the sensitivity analyses%