Case Study How A New Engineering Graduate Can Help His Father Background "I don'know whether to sell it, expandit, les or what. But I don't think we can keep the same thing for many more vars What I really want to do is to keep it for 5 moes was the sell it for a bundle." Elmer Kettler said to his wife, Janise, their son John Kolerade daughter-in-low, Suzanne Gestory, as they were gathered around the dinner table. Ele was sharing thoughts on Gulf Coast Wholesale Auto Parts, a company he has owned and operated for 25 years on the southem outskirts of Houston, Texas. The business has excellen t for parts supply with several national retailers operating in the NAPA, Auto , OR and Achance. Additionally. Gulf Coast operates a rebuild shop serving these same rules for major automobile components, such as carros m ndir rr At his home after dinner, John decided to help his father with an important and difficult deca What to do with his business? Joha d just last year with an engineering degree from a major state university in Texas, where he completed a course in engineering comy. Part of job at Enercon Industries is to perform basic rate of return and present worth analyses management proposals. Information Over the next few weeks. John outlined five options, including his dad's favorite of singin years. John summarized all the estimates over a 10-year h on. The options and given to Elmer and he apreed with them. Option 1: Remove rebuild. Stop operating the rebuild shop and concentrate on selling wholesale parts. The removal of the rebuild operations and the switch to any parts house an expected to cost $750,000 in the first year. Overall revenues will drop to Smillion the first year with expected t increase per year thereafter. Expenses are projected at $0.8 million the first year increasing per year thereafter Option 2: Contract wild grations. To get the build shop ready for an operations contraction to take over will cost $900,000mediately. If expenses stay the same for 5 years, they will average $1.4 million per year, but they can be expected to rise to 52 million per year in year 6 and thereafter. Elmer thinks meves under a contract aangement can be $1.4 million the first year and can ise 5% per year for the duration of a 10-year contract Option 3: Mi q ue and sell out aller Sears (Elmer's personal favorite. There is cest now, but the current trend of negative act profit will probably continue. Projects $1.25 million per year for expenses and S1.15 million per year in T u e Elmer had appraisal last year, and the report indicated Gulf Coast Wholesale Auto Parts is worth a set 52 million. Elmer's wish is to sell out completely after more you at this price, and to make a da that the new owner pays $500,000 per year at the end of your sale time) and the same for the next years. Option 4: Tradeon Elmer has a close friend in the antique au parts business who isi ga "Bing" so he says, with e-commerce. Although the possibility is tisky is enticing to consider a whole new line of parts, but still in the basic business that he already dead CVET The trade-out would cost an estimated milion for mer immediately. The 10-year hom o annual expenses and revenues is considerably higher than for his own business. Expenses are estimated : 3 million per year and revenues at $3.5 million each year, Options Les araw . Gurasould be lowed to o ur key company w remaining the owner and bearing part of the expenses for building, delivery truck c e els. The first-cut estimates for this option are si.5 million to get the business ready now with annual expenses at 5500,000 per year and revenues at si million per year for a 10-year contact Case Study Exercises Help John with the analysis by doing the following 1. Develop the actual cash flow series and incremental cash flow series S1000 for all five options in preparation for an incremental ROR analysis 2. Discuss the possibility of multiple rate of return values for all the actual and incremental cash flow series. Find any multiple rates in the range of 100% 3. If John's father insists that he make 25 year or more on the selected o n the next 10 years, what should he do? Use all the methods of c omic analysis you have leamed so far (PW. AW.ROR) se John's father can understand the recommendation one way or another 4. Prepare plots of the PW versus i for each of the five options. Estimate the heaven of return between options 5. What is the minimum amount that must be received in each of years 5th for option 3 (the one Elmer wants to be best pomically Given this amount what does the sale price have to be assuming the same payment arrangement as presented above Case Study How A New Engineering Graduate Can Help His Father Background "I don't know whether to sell it, expand it, lease it, or what. But I don't think we can keep doing the same thing for many more years. What I really want to do is to keep it for 5 more years, then sell it for a bundle," Elmer Kettler said to his wife, Janise, their son, John Kettler, and new daughter-in-low, Suzanne Gestory, as they were gathered around the dinner table. Elmer was sharing thoughts on Gulf Coast Wholesale Auto Parts, a company he has owned and operated for 25 years on the southern outskirts of Houston, Texas. The business has excellent contracts for parts supply with several national retailers operating in the area - NAPA, AutoZone, O'Reily, and Advance. Additionally, Gulf Coast operates a rebuild shop serving these same retailers for major automobile components, such as carburetors, transmissions, and air conditioning compressors. At his home after dinner, John decided to help his father with an important and difficult decision: What to do with his business? John graduated just last year with an engineering degree from a major state university in Texas, where he completed a course in engineering economy. Part of his job at Energcon Industries is to perform basic rate of return and present worth analyses on energy management proposals. Information Over the next few weeks, John outlined five options, including his dad's favorite of selling in 5 years. John summarized all the estimates over a 10-year horizon. The options and estimates were given to Elmer, and he agreed with them. Option 1: Remove rebuild. Stop operating the rebuild shop and concentrate on selling wholesale parts. The removal of the rebuild operations and the switch to an "all-parts house" are expected to cost $750,000 in the first year. Overall revenues will drop to $1 million the first year with an expected 4% increase per year thereafter. Expenses are projected at $0.8 million the first year, increasing 6% per year thereafter. Option 2: Contract rebuild operations. To get the rebuild shop ready for an operations contractor to take over will cost $400,000 immediately. If expenses stay the same for 5 years, they will average $1.4 million per year, but they can be expected to rise to $2 million per year in year 6 and thereafter. Elmer thinks revenues under a contract arrangement can be $1.4 million the first year and can rise 5% per year for the duration of a 10-year contract. Option 3: Maintain status quo and sell out after 5 years (Elmer's personal favorite). There is no cost now, but the current trend of negative net profit will probably continue. Projections are S1.25 million per year for expenses and S1.15 million per year in revenue. Elmer had an appraisal last year, and the report indicated Gulf Coast Wholesale Auto Parts is worth a net S2 million. Elmer's wish is to sell out completely after 5 more years at this price, and to make a deal that the new owner pays $500,000 per year at the end of year 5 (sale time) and the same amount for the next 3 years. Option 4: Trade-out. Elmer has a close friend in the antique auto parts business who is making a "killing," so he says, with e-commerce. Although the possibility is risky, it is enticing to Elmer to consider a whole new line of parts, but still in the basic business that he already understands. The trade-out would cost an estimated $1 million for Elmer immediately. The 10-year horizon of annual expenses and revenues is considerably higher than for his current business. Expenses are estimated at $3 million per year and revenues at $3.5 million each year. Option 5: Lease arrangement. Gulf Coast could be leased to some turnkey company with Elmer remaining the owner and bearing part of the expenses for building, delivery trucks, insurance, etc. The first-cut estimates for this option are $1.5 million to get the business ready now, with annual expenses at S500,000 per year and revenues at $1 million per year for a 10-year contract. Case Study Exercises Help John with the analysis by doing the following: 1. Develop the actual cash flow series and incremental cash flow series in $1000 units) for all five options in preparation for an incremental ROR analysis. 2. Discuss the possibility of multiple rate of return values for all the actual and incremental cash flow series. Find any multiple rates in the range of 0% to 100%. 3. If John's father insists that he make 25% per year or more on the selected option over the next 10 years, what should he do? Use all the methods of economic analysis you have learned so far (PW, AW, ROR) so John's father can understand the recommendation in one way or another. 4. Prepare plots of the PW versus i for each of the five options. Estimate the breakeven rate of return between options. 5. What is the minimum amount that must be received in each of years 5 through 8 for option 3 (the one Elmer wants) to be best economically? Given this amount, what does the sale price have to be, assuming the same payment arrangement as presented above? Case Study How A New Engineering Graduate Can Help His Father Background "I don'know whether to sell it, expandit, les or what. But I don't think we can keep the same thing for many more vars What I really want to do is to keep it for 5 moes was the sell it for a bundle." Elmer Kettler said to his wife, Janise, their son John Kolerade daughter-in-low, Suzanne Gestory, as they were gathered around the dinner table. Ele was sharing thoughts on Gulf Coast Wholesale Auto Parts, a company he has owned and operated for 25 years on the southem outskirts of Houston, Texas. The business has excellen t for parts supply with several national retailers operating in the NAPA, Auto , OR and Achance. Additionally. Gulf Coast operates a rebuild shop serving these same rules for major automobile components, such as carros m ndir rr At his home after dinner, John decided to help his father with an important and difficult deca What to do with his business? Joha d just last year with an engineering degree from a major state university in Texas, where he completed a course in engineering comy. Part of job at Enercon Industries is to perform basic rate of return and present worth analyses management proposals. Information Over the next few weeks. John outlined five options, including his dad's favorite of singin years. John summarized all the estimates over a 10-year h on. The options and given to Elmer and he apreed with them. Option 1: Remove rebuild. Stop operating the rebuild shop and concentrate on selling wholesale parts. The removal of the rebuild operations and the switch to any parts house an expected to cost $750,000 in the first year. Overall revenues will drop to Smillion the first year with expected t increase per year thereafter. Expenses are projected at $0.8 million the first year increasing per year thereafter Option 2: Contract wild grations. To get the build shop ready for an operations contraction to take over will cost $900,000mediately. If expenses stay the same for 5 years, they will average $1.4 million per year, but they can be expected to rise to 52 million per year in year 6 and thereafter. Elmer thinks meves under a contract aangement can be $1.4 million the first year and can ise 5% per year for the duration of a 10-year contract Option 3: Mi q ue and sell out aller Sears (Elmer's personal favorite. There is cest now, but the current trend of negative act profit will probably continue. Projects $1.25 million per year for expenses and S1.15 million per year in T u e Elmer had appraisal last year, and the report indicated Gulf Coast Wholesale Auto Parts is worth a set 52 million. Elmer's wish is to sell out completely after more you at this price, and to make a da that the new owner pays $500,000 per year at the end of your sale time) and the same for the next years. Option 4: Tradeon Elmer has a close friend in the antique au parts business who isi ga "Bing" so he says, with e-commerce. Although the possibility is tisky is enticing to consider a whole new line of parts, but still in the basic business that he already dead CVET The trade-out would cost an estimated milion for mer immediately. The 10-year hom o annual expenses and revenues is considerably higher than for his own business. Expenses are estimated : 3 million per year and revenues at $3.5 million each year, Options Les araw . Gurasould be lowed to o ur key company w remaining the owner and bearing part of the expenses for building, delivery truck c e els. The first-cut estimates for this option are si.5 million to get the business ready now with annual expenses at 5500,000 per year and revenues at si million per year for a 10-year contact Case Study Exercises Help John with the analysis by doing the following 1. Develop the actual cash flow series and incremental cash flow series S1000 for all five options in preparation for an incremental ROR analysis 2. Discuss the possibility of multiple rate of return values for all the actual and incremental cash flow series. Find any multiple rates in the range of 100% 3. If John's father insists that he make 25 year or more on the selected o n the next 10 years, what should he do? Use all the methods of c omic analysis you have leamed so far (PW. AW.ROR) se John's father can understand the recommendation one way or another 4. Prepare plots of the PW versus i for each of the five options. Estimate the heaven of return between options 5. What is the minimum amount that must be received in each of years 5th for option 3 (the one Elmer wants to be best pomically Given this amount what does the sale price have to be assuming the same payment arrangement as presented above Case Study How A New Engineering Graduate Can Help His Father Background "I don't know whether to sell it, expand it, lease it, or what. But I don't think we can keep doing the same thing for many more years. What I really want to do is to keep it for 5 more years, then sell it for a bundle," Elmer Kettler said to his wife, Janise, their son, John Kettler, and new daughter-in-low, Suzanne Gestory, as they were gathered around the dinner table. Elmer was sharing thoughts on Gulf Coast Wholesale Auto Parts, a company he has owned and operated for 25 years on the southern outskirts of Houston, Texas. The business has excellent contracts for parts supply with several national retailers operating in the area - NAPA, AutoZone, O'Reily, and Advance. Additionally, Gulf Coast operates a rebuild shop serving these same retailers for major automobile components, such as carburetors, transmissions, and air conditioning compressors. At his home after dinner, John decided to help his father with an important and difficult decision: What to do with his business? John graduated just last year with an engineering degree from a major state university in Texas, where he completed a course in engineering economy. Part of his job at Energcon Industries is to perform basic rate of return and present worth analyses on energy management proposals. Information Over the next few weeks, John outlined five options, including his dad's favorite of selling in 5 years. John summarized all the estimates over a 10-year horizon. The options and estimates were given to Elmer, and he agreed with them. Option 1: Remove rebuild. Stop operating the rebuild shop and concentrate on selling wholesale parts. The removal of the rebuild operations and the switch to an "all-parts house" are expected to cost $750,000 in the first year. Overall revenues will drop to $1 million the first year with an expected 4% increase per year thereafter. Expenses are projected at $0.8 million the first year, increasing 6% per year thereafter. Option 2: Contract rebuild operations. To get the rebuild shop ready for an operations contractor to take over will cost $400,000 immediately. If expenses stay the same for 5 years, they will average $1.4 million per year, but they can be expected to rise to $2 million per year in year 6 and thereafter. Elmer thinks revenues under a contract arrangement can be $1.4 million the first year and can rise 5% per year for the duration of a 10-year contract. Option 3: Maintain status quo and sell out after 5 years (Elmer's personal favorite). There is no cost now, but the current trend of negative net profit will probably continue. Projections are S1.25 million per year for expenses and S1.15 million per year in revenue. Elmer had an appraisal last year, and the report indicated Gulf Coast Wholesale Auto Parts is worth a net S2 million. Elmer's wish is to sell out completely after 5 more years at this price, and to make a deal that the new owner pays $500,000 per year at the end of year 5 (sale time) and the same amount for the next 3 years. Option 4: Trade-out. Elmer has a close friend in the antique auto parts business who is making a "killing," so he says, with e-commerce. Although the possibility is risky, it is enticing to Elmer to consider a whole new line of parts, but still in the basic business that he already understands. The trade-out would cost an estimated $1 million for Elmer immediately. The 10-year horizon of annual expenses and revenues is considerably higher than for his current business. Expenses are estimated at $3 million per year and revenues at $3.5 million each year. Option 5: Lease arrangement. Gulf Coast could be leased to some turnkey company with Elmer remaining the owner and bearing part of the expenses for building, delivery trucks, insurance, etc. The first-cut estimates for this option are $1.5 million to get the business ready now, with annual expenses at S500,000 per year and revenues at $1 million per year for a 10-year contract. Case Study Exercises Help John with the analysis by doing the following: 1. Develop the actual cash flow series and incremental cash flow series in $1000 units) for all five options in preparation for an incremental ROR analysis. 2. Discuss the possibility of multiple rate of return values for all the actual and incremental cash flow series. Find any multiple rates in the range of 0% to 100%. 3. If John's father insists that he make 25% per year or more on the selected option over the next 10 years, what should he do? Use all the methods of economic analysis you have learned so far (PW, AW, ROR) so John's father can understand the recommendation in one way or another. 4. Prepare plots of the PW versus i for each of the five options. Estimate the breakeven rate of return between options. 5. What is the minimum amount that must be received in each of years 5 through 8 for option 3 (the one Elmer wants) to be best economically? Given this amount, what does the sale price have to be, assuming the same payment arrangement as presented above