Payback, Net Present Value, Internal Rate of Return, Effects of Differences in Sales on Project Viability

For discount factors use Exhibit $12$B$-1$ and Exhibit $12$B$-2.$

Shaftel Ready Mix is a processor and supplier of concrete, aggregate, and rock products. The company operates in the intermountain western United States. Currently, Shaftel has $14$ cement$-$ processing plants and a labor force of more than $375$ employees. With the exception of cement powder, all materials $($e$.$g$.,$ aggregates and sand$)$ are produced internally by the company. The demand for concrete and aggregates has been growing steadily nationally. In the West, the growth rate has been above the national average. Because of this growth, Shaftel has more than tripled its gross revenues over the past $10$ years.

Of the intermountain states, Arizona has been experiencing the most growth. Processing plants have been added over the past several years, and the company is considering the addition of yet another plant to be located in Scottsdale. A major advantage of another plant in Arizona is the ability to operate year round, a feature not found in states such as Utah and Wyoming.

In setting up the new plant, land would have to be purchased and a small building constructed. Equipment and furniture would not need to be purchased. These items would be transferred from a plant that opened in Wyoming during the oil boom period and closed a few years after the end of that boom. However, the equipment needs some repair and modifications before it can be used. The equipment has a book value of $$200,000,$ and the furniture has a book value of $$30,000.$ Neither has any outside market value. Other costs, such as the installation of a silo, well, electrical hookups, and so on$,$ will be incurred. No salvage value is expected. The summary of the initial investment costs by category is as follows:

Line Item Description Amount

Land $$20,000$

Building $135,000$

Equipment:

Book value $200,000$

Modifications $20,000$

Furniture $($book value$)30,000$

Silo $20,000$

Well $80,000$

Electrical hookups $27,000$

General setup $50,000$

Total $$582,000$

Estimates concerning the operation of the Scottsdale plant follow:

Line Item Description Numerical Data

Life of plant and equipment $10$ years

Expected annual sales $($in cubic yards of cement$)35,000$

Selling price $($per cubic yard of cement$)$ $$45\mathrm{.}00$

Variable costs $($per cubic yard of cement$)$:

Cement $$12\mathrm{.}94$

Sand$/$gravel $6\mathrm{.}42$

Fly ash $1\mathrm{.}13$

Admixture $1\mathrm{.}53$

Driver labor $3\mathrm{.}24$

Mechanics $1\mathrm{.}43$

Plant operations $($batching and cleanup$)1\mathrm{.}39$

Loader operator $0\mathrm{.}50$

Truck parts $1\mathrm{.}75$

Fuel $1\mathrm{.}48$

Other $3\mathrm{.}27$

Total variable costs $35\mathrm{.}08$

Fixed costs $($annual$)$:

Salaries $135,000$

Insurance $75,000$

Telephone $5,000$

Depreciation $58,200*$

Utilities $25,000$

Total fixed costs $298,200$

$*$Straight$-$line depreciation is calculated by using all initial investment costs over a $10-$year period, assuming no salvage value.

After reviewing these data, Karl Flemming, vice president of operations, argued against the proposed plant. Karl was concerned because the plant would earn significantly less than the normal $8\mathrm{.}3\%$ return on sales. All other plants in the company were earning between $7\mathrm{.}5$ and $8\mathrm{.}5\%$ on sales. Karl also noted that it would take more than $5$ years to recover the total initial outlay of $$582,000.$ In the past, the company had always insisted that payback be no more than $4$ years. The company's cost of capital is $10\%.$ Assume that there are no income taxes.

Required:

Question Content Area

$1.$ Prepare a variable$-$costing income statement for the proposed plant.

Shaftel Ready Mix

Income Statement

For the Proposed Plant

Line Item Description Amount Amount

$Sales

Less: Variable expenses

$Contribution margin

Less fixed expenses:

$Salaries

Insurance

Telephone

Depreciation

Utilities Utilities

$Net income

Compute the ratio of net income to sales. Enter as a p

$.$ Compute the payback period for the proposed plant. Round to two decimal places.

fill in the blank $1$ of $1$ years