Question

The Board of XYZ Block Makers is considering a management report that outlines the following recommendations for key operations of the facility: 1. The aggregate mixing operations wishes to purchase a new auger to speed up the mixing operation. Cost $20m, annual maintenance cost 5% of asset, useful life 15 years MACRS, projected benefit undiscounted $3m per annum 2. The machinery shop has asked for a new inspection equipment. Cost $2m, annual maintenance cost 5% of asset, useful life 5 years MACRS, projected benefit undiscounted $200k per annum. 3. The finishing department indicated that moves must be made to the drying room to conform to air quality regulatory standards based on post forming treatment spraying that is required. Capex costs $15m, annual maintenance cost 5% of asset, useful life 20 years MACRS, projected benefit undiscounted $3m per annum. 4. The plant manager wants to purchase a larger more modern safe. Cost $5m, annual maintenance cost 2% of asset, useful life 20 years MACRS, projected benefit undiscounted 50k per annum. For each project there is a single course of action that is proposed. Note that the single project proposals are also independent, for there is no interrelationship among them. The general manager can decide to allocate money to some, none or all of the various project proposals. The capital budget for the company is set at 45m. the internal MARR is set at 12%. 1. Outline the problem objective, alternatives and criteria for choosing the best alternatives 2. Prepare the recommendation to the board outlining the capital budget, and cash flow projection for the array of investments 3. The board takes the decision from your recommendation to reduce the capital budget to 38m with a view that only items of priority of economic return on investment should be pursued. a. Prepare a new problem objective, alternatives and criteria for choosing the best alternatives b. Prepare the recommendation to the board outlining the capital budget, and cash flow projection for the best selection of investments justifying your recommendation.

Answer 1

		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate=MARR=12%=0.12
		N=Year   of Cash Flow
		ANNUAL NET CASH INFLOW
		Project 1 -Agrregate mixing operations	$2,000,000	3miliion-(5%*20million)
		Project2-Machinery Shop	$100,000	(200000-(5%*2million)
		Project 3-Finishing Department	$2,250,000	(3million-(5%*15 million)
		Project4-Plant Manager	-$50,000	(50000-(2%*5 million)
	N		Project1-Aggreegate Mixing		Project 2-Machinery shop		Project 3-Finishing department		Project 4-Plant Manager
		N	CF1	PV1=CF1/((1.12^N)	CF2	PV2=CF2/(1.12^N)	CF3	PV3=CF3/((1.12^N)	CF4	PV4=CF4/((1.12^N)
		Year	Cash Flow	Present Value	Cash Flow	Present Value	Cash Flow	Present Value	Cash Flow	Present Value
		0	-$20,000,000	-$20,000,000	-$2,000,000	-$2,000,000	-$15,000,000	-$15,000,000	-$5,000,000	-$5,000,000
		1	$2,000,000	$1,785,714	$100,000	$89,286	$2,250,000	$2,008,929	-$50,000	-$44,643
		2	$2,000,000	$1,594,388	$100,000	$79,719	$2,250,000	$1,793,686	-$50,000	-$39,860
		3	$2,000,000	$1,423,560	$100,000	$71,178	$2,250,000	$1,601,506	-$50,000	-$35,589
		4	$2,000,000	$1,271,036	$100,000	$63,552	$2,250,000	$1,429,916	-$50,000	-$31,776
		5	$2,000,000	$1,134,854	$100,000	$56,743	$2,250,000	$1,276,710	-$50,000	-$28,371
		6	$2,000,000	$1,013,262	SUM	-$1,639,522	$2,250,000	$1,139,920	-$50,000	-$25,332
		7	$2,000,000	$904,698			$2,250,000	$1,017,786	-$50,000	-$22,617
		8	$2,000,000	$807,766			$2,250,000	$908,737	-$50,000	-$20,194
		9	$2,000,000	$721,220			$2,250,000	$811,373	-$50,000	-$18,031
		10	$2,000,000	$643,946			$2,250,000	$724,440	-$50,000	-$16,099
		11	$2,000,000	$574,952			$2,250,000	$646,821	-$50,000	-$14,374
		12	$2,000,000	$513,350			$2,250,000	$577,519	-$50,000	-$12,834
		13	$2,000,000	$458,348			$2,250,000	$515,642	-$50,000	-$11,459
		14	$2,000,000	$409,240			$2,250,000	$460,395	-$50,000	-$10,231
		15	$2,000,000	$365,393			$2,250,000	$411,067	-$50,000	-$9,135
		16	SUM	-$6,378,271			$2,250,000	$367,024	-$50,000	-$8,156
		17					$2,250,000	$327,700	-$50,000	-$7,282
		18					$2,250,000	$292,589	-$50,000	-$6,502
		19					$2,250,000	$261,240	-$50,000	-$5,805
		20					$2,250,000	$233,250	-$50,000	-$5,183
		NPV=Net Present Value=Sum of PVs					SUM	$1,806,248	SUM	-$5,373,472
		NPV ofProject 1 -Agrregate mixing operations	-$6,378,271
		NPV of Project2-Machinery Shop	-$1,639,522
		NPV of Project 3-Finishing Department	$1,806,248
		NPV ofProject4-Plant Manager	-$5,373,472
		Project1,2 and4 have Negative NPV
		These Projects are not accepted
		Only Project 3 has Positive NPV
		Project 3 (Finishing Department) is accepted