The Elmer Fudd Brick Making Company has has several years of solid growth. The company has accumulated $5 million dollars of cash which may be spent on new Capital Spending Projects. A list of 5 projects has been assembled, as the Accounting Manager, you have been tasked with picking the project(s) to be funded. You may not spend more than the $5 million dollars, but you can spend less. Those funds not spent this year will not roll over to next year. Elmer is hoping that next year he will have an equally large capital spending program.

To support your conclusion you will need to provide (when applicable):

An ROI calculation

A residual income calculation

A cash flow projection, with present value calculations

A justification for you answer

Use an internal rate of 10%

If any information is missing you are to make estimates as needed. However, you will need to justify your estimates.

Project A

Repair or replace the old brick making machine

Cost to Repair and Overhaul the Existing Brick Making Machine is $800,000. The Brick Making Machine will be down for 4 weeks. Average Net Revenue is $300,000 per month from operations. Operating Costs of the existing machine are $20,000 a month. At the end of 4 years the old machine will need to be overhauled again. Net revenue from demolition and sale of scrap is $15,000.

Purchase of a new brick making machine is $1,000,000. No down time, as the new machine can be constructed as the old one continues to operate. New machine will take 4 months to assemble and test. New machine will produce 2 times more bricks and the cost of operation is $15,000 monthly. The new machine will need to be overhauled in 6 years, at the same cost as overhauling the old machine. (Est. $750,000)

If the existing machine is not overhauled this year, the cost will double next year. To get by, the repair costs of $96,000 will need to be spent, with work starting about July 1. The funds will come from the operating budget.

Project B

Build a new brick yard facility in Katy, Tx

This yard will expand operations by having 2 operating facilities.

Cost estimate = $4,200,000

Useful life = 15 years or more

Land available in Katy, cost is $1,000,000

Cost to construct new facility is $3,200,000 which breaks down as:

Purchase of new machine = $1,000,000

Construction of new office building = $800,000

Construction of garage/warehouse = $500,000

Construction of driveways and parking lots = $200,000

Outside contractor, licenses, and other costs = $500,000

Similar to Project A

Purchase of new machine is $1,000,000 which is included in the above data.

This gives the Katy yard 2 times the capacity of that found at Conroe.

New machine will take 4 months to assemble and test.

New machine will produce two times more brick and the cost of operation is $25,000 monthly.

The new machine will need to be overhauled in 6 years, at the same cost as overhauling the old machine. (Est. $750,000)

The construction process should take 8 months, but it is wise to allow the entire process to take the best part of 12 months. Construction can begin January of this year and should end by December of this year.

Annual Estimated Information:

Revenue $2,000,000

Cost of Goods Sold $300,000

Sales and Admin Costs $500,000

Project C

Repair/Overhaul old forklifts vs. buy new forklifts

Background:

The Conroe yard operates 3 forklifts, all bought 6 years ago. If properly maintained they could last 4 more years. New forklifts are expected to last no longer than 10 years, and need major repairs every 2 years of operations

Three plans have been discussed:

1. Overhaul them at a cost of $5,000/each this year. The cost would be considered maintenance, and not come out of capital budget. This will keep them operational for 2 years. At the end of 2 years, due to wear and tear, they will need to be replaced with new machines. (This would only be considered if Project B was executed, as the profits from the new yard would make purchase of new forklifts easier.)

2. Overhaul them at a cost of $12,000/each. This will add 4 years to their lives, and will permit routine maintenance over the 4 years. This would make the forklifts 10 years old and will require complete replacement at that time.

3.Purchase new forklifts at a cost of $45,000/each. Useful life = 10 years (Ignore salvage value). Maintenance schedule is estimated to be:

First 3 years = $2,000 per year

Year 4 overhaul and maintenance = $5,000

Year 5-7 = $3,000 per year

Year 8 overhaul and maintenance = $5,000

Year 9 and 10 = $4,000 per year

Project D

Buy ACME Brick Company of Sugarland Tx

The owner of ACME Brick is considering retirement, and is willing to sell the company as a going-concern. The buyer would take over operations of a profitable company, as is. No need to hire new staff, except to replace any staff that leave as a result of the change of ownership.

Estimated cost of the acquisition = $5,000,000 paid this year

Profits of the existing company are about $1,500,000/per year. No change of terms is possible, take the deal or leave the deal.