The Bonwire Kente Company Case

Your friend, Kwame Nkrumah from Ghana knows that you are taking graduate classes and asks for your opinion on an issue he faces as owner/manager of the Bonwire Kente Company which he started 5 years ago with 20 employees. The Company has grown by leaps and bounds to the point where it now employs over five hundred persons and has become a nightmare to manage.

The Company weaves the cotton it grows on its 4,000- acre farm into Kente cloth, which it dyes and sells both locally and abroad. The process from farm to market is complex and varied. At present he has identified the following five major phases:

Phase I - Planting, growing, reaping, transporting, storing the cotton employs three hundred (300) persons

Phase II - Dyeing and weaving process employs one hundred (100) persons

Phase III - Quality control employs twenty (20) persons

Phase IV - Marketing and Sales employs seventy (75) persons

Phase V Distribution employs forty (40) persons

Phase VI Administration, Accounting, Collection and Cash Management employs thirty (30) persons

The major issue he faces is managing growth for maximum profitability and reduced costs.

Required:

Part C

Finally, Kwame has told you that he is facing an investment decision that involves purchasing a weaving machine that the engineers have told him would increase efficiency and productivity. If he decides to purchase the Weaver Pro, he can trade in the current Weaver I for $150,000. The data collected about the Weaver Pro follows.

Price $1,000,000

Productive Life 7 years

Pretax cash flows:

Year 1 $ 250,000

Year 2 350,000

Year 3 500,000

Year 4 800,000

Year 5 800,000

Year 6 800,000

Year 7 750,000

Salvage value at the end of year 7, $100,000.

The companys average tax rate is 15% and its average cost of capital is 10%.

Advise Kwame whether it would be a good decision to purchase the Weaver Pro with supporting arguments.