Ken wants to buy a factory unit that belonged to a now bankrupt company called Camtech Ltd. The unit has machinery inside that was used to make parts for the automotive industry and Ken believes he can resurrect the business. The unit has not been in use for two years, but an engineering inspection suggests that, although all the equipment in it is ten years old and dates back to Camtechs foundation, it is in working order. Kens main motivation is that the unit has been on the market for over a year without a buyer and he has been able to negotiate a price that he feels confident will allow profits to be made. His plan is to rebuild the business over a five-year period and then to sell it on as a profitable entity for 2,000,000. Ken supplies the following details about the unit:

1. The purchase price of the unit is 480,000 and includes everything that is inside including all machinery, some raw materials and a considerable amount of rubbish including scrap parts, old computers and office furniture.

2. The machinery makes camshafts which are a key component of internal combustion engines and Kens research shows that the bankrupt company was well regarded by car manufacturers and that they had a good order book before the accountant ran off with the bank balance, having not paid their suppliers for many months.

3. Camshafts sell for 30 each and the unit has the capacity to make up to 120,000 units per year, based on 12 months continuous operation. Kens initial research suggests he can get orders for 12,000 units in year one, doubling each year for each of the subsequent three years and reaching capacity in year five. Ken expects sales to rise steadily through each year until capacity is reached.

4. The cost of raw materials is 10/camshaft. Ken is confident that this is stable and not subject to change in at least the first three years, although he concedes that it is probably sensible to allow a 10% increase in raw material costs in years four and five.

5. The process is known to require the use of significant amounts of electricity, although the details are not clear. Ken has found old bills that show the last two years before closure had production volumes of 84,320 units and 102,180 units respectively and that the electricity bills in those years were 572,707 and 687,904 respectively. Imminent rises in the cost of electricity are not expected.

6. Ken has also found bills relating to staffing and maintenance of the machinery.

a. The company had an office staff of 8 people that cost 400,000, but Ken observes that 100,000 of this was the managing directors salary and he intends to fill that role himself, at least in the short run. He says he wont draw a salary for the first two years while the company is restarting, but after that he thinks a new MD will need to be appointed. He also believes a smaller office team will be required in the first instance and that 120,000 will satisfy the salary bill for years one and two, rising to 180,000 in year three (not including the MD appointment), 240,000 in year four and 300,000 in year five.

b. The maintenance bills suggest that the machinery was expensive to keep going. A local company called Smooth Running Ltd. was contracted to run regular maintenance on the machines and the contract for running maintenance and repair cost 45,000 per year. In addition, a two-year overhaul cycle was required to ensure that the machines were properly calibrated to ensure the camshafts were made to the appropriate degree of precision. These overhauls cost 50,000 and require production to cease for one calendar month while it takes place. Ken has checked and Smooth Running is willing to resume the contract under the same terms. There was an overhaul in the last year of Camtechs operation and Smooth running think that the machines will be ok if there is an initial overhaul at the end of year one.

7. Some immediate repairs are required to the fabric of the building including the roof and interior walls, particularly in the office space. These repairs will take two months and have been estimated to cost 130,000. Once repairs are completed the contractor has offered a maintenance contract for the building at 5,000 per year if Ken pays the repair costs up front. Ken is not sure if the repair contract is necessary.

8. The machines require a skilled staff to run them. The capacity of 120,000 units per year is based upon a single shift pattern delivering a maximum of 10,000 units per month. At lower volumes (below 24,000 units per year) the production line can be operated by three engineers, but between 24,000 and 48,000 units four engineers are required and above 48,000 units five engineers are required. The requirements are laid out in the table below:

Production level up to (units) 24,000 48,000 Above 48,000

Technician level engineers 2 2 3

Graduate level engineers 1 2 2

Technicians are paid 24,000 per year, but graduates are paid 36,000 per year. It is expected that the general tidying up and cleaning of the premises and other odd jobs can be done by a janitor who will be paid 14,000 per year.

9. Local taxes on the unit amount to 54,000 per year and other utility cost (non-electricity related) amount to 22,000 per year.

10. Working capital of 50,000 is required to operate the plant.

Required: Analyse the data for Kens plan to resurrect Camtech and advise him on the viability of the project. Your advice should include commentary on the qualitative aspects of the project as well as any assumptions that you have made, or limitations that you perceive due to limitations in the available information.