Financial Analysis and Case Study

Custom Molds & Casting Company makes custom molds and fabricated parts for its customers. These molds are made to order and are used to make various products. Custom Molds & Casting also makes parts based on customer satisfaction. Custom Molds & Casting casts, fabricates, and machines these parts to the specifications of customers. The company has experienced an increase in business and this has led to its decision to purchase new equipment, which would involve capital expenditures.

The equipment would cost $300,000, plus a shipping cost of $20,000 and $22,000 in installation fees. This equipment has an economic life of 4 years, and the companys accounting department has noted that this equipment is classified for a MACRS 3-year class. The machinery is expected to have a salvage value of $15,000 after 4 years of use.

The marketing department has provided the following 4-year sales forecast for the new products made from this equipment. The price and the cost per unit is given below:

Four Year Sales Forecast

Description	Year 1	Year 2	Year 3	Year 4
Units	1,500	1,575	1,605	1,626
Sales Price per Unit	$240	$252	$264	$276
Unit Cost	$100	$105	$110	$115

The sales price and cost are expected to increase by 4.8% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 12% of sales revenues. The firms tax rate is 42%, and its overall weighted average cost of capital is 12.8%.

Equipment Cost	$300,000
Shipping Charge	$20,000
Installation Charge	$22,000
Economic Life	4
Salvage Value	$15,000
Tax Rate	42.0%
Cost of Capital	12.8%
Net Working Capital/Sales	12.0%

Depreciable Basis = Equipment + Freight + Installation

Depreciable Basis = $342,000

Year	%	Basis	Depreciation (% x Basis)	Remaining Book Value
1	0.3333	$342,000	$113,989	$228,011
2	0.4445	$342,000	$152,019	$75,992
3	0.1481	$342,000	$50,650	$25,342
4	0.0741	$342,000	$25,342	$0

Write a 1,050 to 1,400-word analysis in which you do the following:

• Construct annual incremental operating cash flow statements for the next 4 years.
• Calculate the net present value (NPV) based on your projected cash flows.
• Provide rationale explaining why Custom Molds & Casting Company should purchase this equipment.
• Discuss what other factors you need to consider in your decision.
• Conduct a sensitivity analysis.
• Assume that the new product line is expected to decrease sales of the firms other lines by $50,000 per year. Should this be considered in the analysis? Why or why not? If so, how?