Cardinal Manufacturing produces products for various businesses. The company is considering expansion into bicycle parts, given the increased interest in bicycling and the new types of bicycles (e.g., e-bikes, recumbent bicycles, etc.) being developed. The CEO of Cardinal Manufacturing has asked the Corporate Controller to perform an analysis to assess the potential profitability of this potential expansion. The Controller was able to collect the following information.

• Management will not accept projects unless they bring an annual return of at least 15%.
• The Controller decided to use a 14-year period of time for the analysis.
• For cash flow purposes, the company will need to borrow $100,000 at the initiation of the expansion. An area bank will loan the $100,000, and not require any payments on the loan until the end of the 7th year. At the end of the 7th year, the first annual payment of $33,207 will be made, with this continuing until the end of the 14th year (the note is at 10% annual interest), with $33,207 payments being made at the end of years 8 through 14.
• Materials cost is projected to begin at $1,300,000 and is anticipated to increase at a rate of 2% annually.
• Labor cost is projected to begin at $3,012,500 and is anticipated to increase at a rate of 3 1/2% annually.
• Overhead cost is expected to be 14% of labor cost.
• Cardinal Manufacturing has older equipment that it will use at the initiation of the project but is expected not to need the equipment after 2 years, and it expects to be able to sell this equipment for $196,000 at the end of the 2nd year.
• Cardinal will need to invest in new equipment at the beginning of the expansion, and this equipment is expected to cost $2,575,000. It expects this equipment to last 7 years and hopes to be able to sell the equipment for $350,000 at the end of the 7th year. At this same time, Cardinal will need to buy new equipment again, at an anticipated cost of $2,800,000, and it is expected that this equipment will last until the end of the 14th year, at which time it is hoped it can be sold for $380,000.
• Marketing costs for the new bicycle parts is expected to start at $680,000 for the first year, then drop to $240,000 the second year (brand recognition will have been established), then it is hoped that marketing costs can decrease after the second year at an annual rate of 4 1/2%.
• Cardinal plans to initially rent a manufacturing facility, then later purchase a manufacturing facility. Rent will begin year one, at an annual cost of $355,000, and is expected to increase at an annual rate of 7%. At the end of the eighth year, Cardinal plans to discontinue renting and to purchase a facility that it expects to cost $1,200,000. Also, the cost to move equipment from the rental facility to the new facility is expected to be $210,000.
• Cardinal expects to generate revenue from bicycle part sales of $5,400,000 in the first year, and they expect this revenue to increase at a rate of 5% per year.
  
  Required:

1). Identify the analytical techniques you propose that are appropriate for this analysis.

2). Perform the analysis, using the techniques you identified in #1.

3). Draw conclusions, should Cardinal Manufacturing move forward with this venture? Explain the information provided by the analyses.

Answer rating: 100% (QA)

Answer 1 The technique appropriate for this analysis is Net Present Value This technique will discou... View the full answer