Milani Electronics sells only one product, its ABC gadget. The company put together a strategic

plan that included the following sales estimates:

Year Sales in Units

Currently, the product sells for $ Cost data associated with the product is as follows:

Materials to create the product: $

Each product requires minutes of labor and the average hourly rate is $ per hour

Variable MOH costs are $ per unit

Selling Costs are $ per unit

Factory Supervisor Salaries are $ per year

Factory Property Tax and Insurance are $ per year

Other Administrative Costs are $ per year

Production levels are expected to be and for the next three years.

Milanis is preparing to ask Hesburgh Bank for a loan for some new equipment. The loan is expected

to be for $ and it carries an interest rate. As part of its due diligence, the bank would like

to see three years of projected income statements following GAAP you can ignore any potential

interest expense from the loan In order to better understand the implications on profits, Milanis

executive management team prefers to use a contribution formatted income statement for the same

threeyear period.

Requirement : Please provide three years of projected income statements for the bank and

the management team. The bank and management team are also interested in analyzing the

companys profitability so please use all appropriate ratios or calculations to help each group

understand the business.

The proceeds from the loan will be used to purchase some new factory equipment that will enhance

the product and give it broad market appeal. The company has performed marketing and cost

studies that revealed the following information:

a New equipment would have to be acquired to produce the device. The equipment would cost

$ and have a sixyear useful life. After six years, it would have a salvage value of

about $

b Sales unit projections are at above the previously budgeted levels and the quality

enhancement would allow Milanis to sell the product for $

c Updated cost information includes the following:

Materials to create the product: $

Each device requires minutes of labor and the average hourly rate is $ per hour

Variable MOH costs are $ per unit

Selling Costs are $ per unit

Factory Supervisor Salaries are $ per year

Factory Property Tax and Insurance are $ per year

Other Administrative Costs are $ per year

Production levels would also increase by per year over previously budgeted amounts

Accounting Final Case

c Production and sales of the device would require working capital of $ to finance

accounts receivable, inventories, and daytoday cash needs. This working capital would be

released at the end of the projects life.

e The company uses straight line depreciation by taking the cost of an asset less the salvage

value.

f In addition to the costs above and to gain rapid entry into the market, the company would

have to advertise heavily. The advertising costs would be:

Year

Amount of Yearly

Advertising

$

$

$

Milanis finance team has warned the executive management that due to the current rise in interest

rates, the rate offered on the loan is at risk and could change. As a result, any capital budgeting

analysis should include interest rate swings of

Requirement : Please provide the necessary capital budgeting analysis for this project

assume cash flows in years are the same as year as well as updated projected income

statements, ratios, and calculations from requirement for the next three years for Milanis

Unlike before, you should include interest expense in your projections assume is the

correct interest rate and you can assume the entire loan wont be paid off until the end of the

third year.

Requirement : Prepare a written analysis that provides a recommendation for or against

purchasing the new equipment. The quality of your work should be that of a report ready to

be presented to the executive management team at Milani Inc.