Question

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:

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:

Life of plant and equipment		10 years
Expected annual sales (in cubic yards of cement)		35,000
Selling price (per cubic yard of cement)		$45.00
Variable costs (per cubic yard of cement):
Cement		$12.94
Sand/gravel		6.42
Fly ash		1.13
Admixture		1.53
Driver labor		3.24
Mechanics		1.43
Plant operations (batching and cleanup)		1.39
Loader operator		0.50
Truck parts		1.75
Fuel		1.48
Other		3.27
Total variable costs		35.08
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 8.3% return on sales. All other plants in the company were earning between 7.5 and 8.5% 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.

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

Shaftel Ready Mix
Income Statement
For the Proposed Plant
Sales		$
Less: Variable expenses
Contribution margin		$
Less fixed expenses:
Salaries	$
Insurance
Telephone
Depreciation
Utilities
Net income		$

Compute the ratio of net income to sales. Enter as a percent, rounded to two decimal places. 3.24 % Is Karl correct that the return on sales is significantly lower than the company average? Yes 2. Compute the payback period for the proposed plant. Round to two decimal places 3.28 years Is Karl right that the payback period is greater than 4 years? No v 3. Compute the NPV and the IRR for the proposed plant. Round present value calculations and final NPV to the nearest dollar. NPV 306,698 IRR The IRR is between 25% and 30% Would your answer be affected if you were told that the furniture and equipment could be sold for their book values? Yes If your answer would be affected if you were told that the furniture and equipment could be sold for their book values, repeat the analysis with this effect considered. If not, leave the entry boxes blank. Round present value calculations and final NPV to the nearest dollar NPV IRR The IRR is between 12% and 14% V

I just need the second part of number three.

Answer 1

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btly lowe Than The compan avesage 252000 01200 ¥ Net qt)(ome of 51000 + depreciation of 56,200. k reduces ?be N/estment. Valu o Sold fos hes bookvalu e because these ooul d ancl Th cost should be include! qhrhe 0tqirol anuestment

NpV 3s2000 100 0 358000 6S81 6. l45 167200 35S0o 672 60 3,884 Thus ^fte PRR is between 25% and 30% eent can be sold so% book alue DİXOcnt factos" os poesent Value / caS 89006 600 588 060 6s8 74y - 10 16444

5. 42 see a bedaren l8% a.J 14% toars tet value of The assets the opportuntY cost Ds Phe te concept hese. VBsieek- even X8s cubic Yards Np v (ustoR beak un mount e caso Dscount factosPt value 0 39 000 3S8600 1- lo S6 800 blus 66S1

35300 0 563 00 6 a 63 The Pruest ment not acceptable, although (ame close, spt is pssible肋have apositive Npval Phe bseat- eien po Break-even pont Income i noe for cash floo. stoe Pbege ase ヲ defined) for accou nt in( Accounting足ncome utderstatea cash room zeso ncome dees nok meat erocach ttlous

5) cost of capital 10% fos lo Yeo'ç, so df -6.145 6 S353000 CE 51 982 cash Flouw 1082 vet £tcome, Sales-va table expenses- Esey expenses Sale a 13 4856o e eapenes red expenses 10834