Calculate the net operating cash flows for both projects, using appropriate depreciation schedules.
-Any assistance with this question would be greatly appreciated!
Cases In Financial Management BENTLEY CUSTOM CERAMICS to Julianis surprise, she had immediately weiten Country Club, and "just had to have an original brick work in her house, as well. Julian, not wanting anything to do with that customer, quoted a ridiculously high price for the requested work. The last pieces of a twenty-foot-long decorative brick wall were just coming out of the firing kiln. Julian Bentley jumped as the telephone rang, dropping the last brick for the wall, but fortunately, it did not break. Julian answered the phone. It was Mr. Reynolds, a loan officer from the bank. "Your loan's been approved," Reynolds said. "just come sign the papers and you can order your new kiln. Reynolds had really gone to bat for Julian at the bank to get his loan approved. He had been a satisfied customer from way back. Four years ago, when Reynolds bought his dream house'in Williamsburg, he had been exceptionally impressed by an interior wall of relief sculpture done in brick. He had called the contractor for the house and found out about Julian, who had produced the brick. He contracted Julian to do another relief sculpture and a mosaic tile work and was favorably impressed by both. In fact, it was Reynold's suggestion that Julian consider expanding the business. Initially, Julian had considered himself to be a "starving artist," making enough money to survive while doing what he loved to do work with ceramic arts. He had not counted on a continuing stream of contracts from Williamsburg's prestige-seeking residents. Initially, he had worked on a few small projects for extra money while running a craft shop on Route 60 just south of Williamsburg. He sold ceramic items custom made by him, and products made by other local artists. A milestone event happened five years ago, however. A shop patron who Julian really did not like has seen some of the small projects Julian had done for an executive for Castle Green a check for half of his price, and said she would pay the rest upon completion of the job. Word of mouth soon found Julian enjoying plenty of brick and mosaic jobs at premium prices. He had a six- month backlog of work, and was running his ceramic kiln all day, every day, except for increasing downtime when the kiln needed maintenance and repair. The need for new productive equipment and employees to handle the non-artistic aspects of the business became increasingly apparent. Julian felt that he could meet his current demand, and even expand his business by investing in better production equipment. He had also considered making molds for certain designs that had special appeal, and producing limited runs of the design. It would not be custom artwork, but Julian felt there may be demand for limited run brick art, as well. We have also arranged for a working capital loan and a line of credit for you." Reynolds said. The loans will be secured by the equipment, and by your property in Lee Hall." Lee Hall was a smal community about ten miles from Williamsburg, where Julian owned a house and seven acres of land, a family property he had inherited free of mortgages. Thank you, Mr. Reynolds. I'll be in touch." replied Julian EQUIPMENT One of the decisions Julian had wrestled with was the choice between an electric and a gas- fired kiln. Julian had used an electric kiln for years, and had been pleased with their ease of firing thin flat ceramic objects, such as tile or thin brick fascia, or tall pieces requiring even heating. Julian liked the idea that no flammable gas was 11 Page Cases In Financial Management used, and that all he had to do was turn the kin which had estimated energy usage under normal on to start the process. The greatest problem with running conditions. Fortunately, the information his electric kiln was that it was very expensive to was available for both of the types of kilns he was run. Using electricity to provide heat was not very considering. He felt certain that the numbers had cost effective, he thought, and he was concerned meaning. His limited understanding of analytical that a high capacity electric kiln would be matters, however, handicapped him in terms of prohibitively costly to run. The kiln had also been understanding their significance. fairly costly to maintain and repair. Although his financing package had been Gas fired kilns had nice features that offset the approved by the bank, he wondered whether electric kilns' problems. For one thing, the heat Reynold's insistence about his approval was was much more uniform within the kiln, creating justified by the feasibility of the planned more consistency of the product. Temperature expansion. He also wondered about which kiln control was easier, and quickly adjusted. Certain alternative was better in the long run. Julian freely glazing colors were possible with fire that were admitted that he was not a very effective not possible with electric heating. Gas kilns businessman, and had no idea about how to typically were available in a wider variety of sizes determine if the investment would produce a and large production kilns would yield large satisfactory financial result for him. He felt very quantities of product quickly. One of the best fortunate to have developed a reputation that features of gas was that it was cheap to operate. allowed him to have such a substantial gap One of Julian's fellow artists in Richmond said between the price he charged for his work and that he ran his 92 cubic foot kiln for only $7.10 the direct cost of the raw materials and operating per burn, on average. The kiln was about a 4.5 costs. Julian was also a bit uneasy about foot cube, with shelves inside for layering items. borrowing, especially if he had to pledge the family home for collateral. What Julian was considering was a bank, for three units, each having a 78 cubic foot capacity. Julian reasoned that small production runs could be handled by one or two kilns, but he could also THE QUESTION run all three for large jobs. The gas kilns were $27,000 each, a total investment of $81,000 plus Julian had been advised by Mr. Reynolds around $4,800 for installation and expert testing. about the importance of projected sales and Julian figured that if he went to gas firing, he expense information when applying for a certainly wanted them to be as safe as possible. business loan. Julian had provided Reynolds with some cost projections. Julian felt the projections The same volume capacity could be were realistic; he had been fairly conservative, accomplished with twelve electric units, costing understanding his expected sales amounts and $3,750 each. The installation would only be 5800 overstating expenses slightly (see Exhibit 4). He for industrial electric service. Julian was not was unsure about the extra utilities expenses looking forward to having to set up all twelve units associated with either type of kiln, but had for large jobs. He also had concerns that the provided Reynolds the other figures. That was quality (uniformity) of the product would suffer, part of the reason Julian was puzzled by the not only because of the inconsistencies within the sudden loan approval. Had Reynolds done some single units, but also because of differences kind of analysis of Julian's figures? Or had he just between the units. pushed the loan application through? The only information Julian had to assist in the decision was an operational cost summary provided by Production Testing Service, Inc., 21 Page Cases In Financial Management BENTLEY CUSTOM CERAMICS to Julianis surprise, she had immediately weiten Country Club, and "just had to have an original brick work in her house, as well. Julian, not wanting anything to do with that customer, quoted a ridiculously high price for the requested work. The last pieces of a twenty-foot-long decorative brick wall were just coming out of the firing kiln. Julian Bentley jumped as the telephone rang, dropping the last brick for the wall, but fortunately, it did not break. Julian answered the phone. It was Mr. Reynolds, a loan officer from the bank. "Your loan's been approved," Reynolds said. "just come sign the papers and you can order your new kiln. Reynolds had really gone to bat for Julian at the bank to get his loan approved. He had been a satisfied customer from way back. Four years ago, when Reynolds bought his dream house'in Williamsburg, he had been exceptionally impressed by an interior wall of relief sculpture done in brick. He had called the contractor for the house and found out about Julian, who had produced the brick. He contracted Julian to do another relief sculpture and a mosaic tile work and was favorably impressed by both. In fact, it was Reynold's suggestion that Julian consider expanding the business. Initially, Julian had considered himself to be a "starving artist," making enough money to survive while doing what he loved to do work with ceramic arts. He had not counted on a continuing stream of contracts from Williamsburg's prestige-seeking residents. Initially, he had worked on a few small projects for extra money while running a craft shop on Route 60 just south of Williamsburg. He sold ceramic items custom made by him, and products made by other local artists. A milestone event happened five years ago, however. A shop patron who Julian really did not like has seen some of the small projects Julian had done for an executive for Castle Green a check for half of his price, and said she would pay the rest upon completion of the job. Word of mouth soon found Julian enjoying plenty of brick and mosaic jobs at premium prices. He had a six- month backlog of work, and was running his ceramic kiln all day, every day, except for increasing downtime when the kiln needed maintenance and repair. The need for new productive equipment and employees to handle the non-artistic aspects of the business became increasingly apparent. Julian felt that he could meet his current demand, and even expand his business by investing in better production equipment. He had also considered making molds for certain designs that had special appeal, and producing limited runs of the design. It would not be custom artwork, but Julian felt there may be demand for limited run brick art, as well. We have also arranged for a working capital loan and a line of credit for you." Reynolds said. The loans will be secured by the equipment, and by your property in Lee Hall." Lee Hall was a smal community about ten miles from Williamsburg, where Julian owned a house and seven acres of land, a family property he had inherited free of mortgages. Thank you, Mr. Reynolds. I'll be in touch." replied Julian EQUIPMENT One of the decisions Julian had wrestled with was the choice between an electric and a gas- fired kiln. Julian had used an electric kiln for years, and had been pleased with their ease of firing thin flat ceramic objects, such as tile or thin brick fascia, or tall pieces requiring even heating. Julian liked the idea that no flammable gas was 11 Page Cases In Financial Management used, and that all he had to do was turn the kin which had estimated energy usage under normal on to start the process. The greatest problem with running conditions. Fortunately, the information his electric kiln was that it was very expensive to was available for both of the types of kilns he was run. Using electricity to provide heat was not very considering. He felt certain that the numbers had cost effective, he thought, and he was concerned meaning. His limited understanding of analytical that a high capacity electric kiln would be matters, however, handicapped him in terms of prohibitively costly to run. The kiln had also been understanding their significance. fairly costly to maintain and repair. Although his financing package had been Gas fired kilns had nice features that offset the approved by the bank, he wondered whether electric kilns' problems. For one thing, the heat Reynold's insistence about his approval was was much more uniform within the kiln, creating justified by the feasibility of the planned more consistency of the product. Temperature expansion. He also wondered about which kiln control was easier, and quickly adjusted. Certain alternative was better in the long run. Julian freely glazing colors were possible with fire that were admitted that he was not a very effective not possible with electric heating. Gas kilns businessman, and had no idea about how to typically were available in a wider variety of sizes determine if the investment would produce a and large production kilns would yield large satisfactory financial result for him. He felt very quantities of product quickly. One of the best fortunate to have developed a reputation that features of gas was that it was cheap to operate. allowed him to have such a substantial gap One of Julian's fellow artists in Richmond said between the price he charged for his work and that he ran his 92 cubic foot kiln for only $7.10 the direct cost of the raw materials and operating per burn, on average. The kiln was about a 4.5 costs. Julian was also a bit uneasy about foot cube, with shelves inside for layering items. borrowing, especially if he had to pledge the family home for collateral. What Julian was considering was a bank, for three units, each having a 78 cubic foot capacity. Julian reasoned that small production runs could be handled by one or two kilns, but he could also THE QUESTION run all three for large jobs. The gas kilns were $27,000 each, a total investment of $81,000 plus Julian had been advised by Mr. Reynolds around $4,800 for installation and expert testing. about the importance of projected sales and Julian figured that if he went to gas firing, he expense information when applying for a certainly wanted them to be as safe as possible. business loan. Julian had provided Reynolds with some cost projections. Julian felt the projections The same volume capacity could be were realistic; he had been fairly conservative, accomplished with twelve electric units, costing understanding his expected sales amounts and $3,750 each. The installation would only be 5800 overstating expenses slightly (see Exhibit 4). He for industrial electric service. Julian was not was unsure about the extra utilities expenses looking forward to having to set up all twelve units associated with either type of kiln, but had for large jobs. He also had concerns that the provided Reynolds the other figures. That was quality (uniformity) of the product would suffer, part of the reason Julian was puzzled by the not only because of the inconsistencies within the sudden loan approval. Had Reynolds done some single units, but also because of differences kind of analysis of Julian's figures? Or had he just between the units. pushed the loan application through? The only information Julian had to assist in the decision was an operational cost summary provided by Production Testing Service, Inc., 21 Page
