Using parameters and the value calculated, determine if the following is a good idea:

Your company has an existing manufacturing process that produces shingles. The process is relatively stable but you think there is room for improvement. Your company currently manufactures approximately 8,000 units per month but demand is increasing over the next year and your improvements will help you meet that demand. The expected monthly volumes are:

Month- 1 10,000, Month-2 8,000, Month-3 11,000, Month-4 11,000, Month-5 10,000, Month-6 11,000, Month-7 9,000 Month-8 9,000, Month-10 10,000

Month-11 13,000, Month-12 14,000 TOTAL 125,000

You boldly state that, for a mere $1,000,000 investment in capital equipment plus another $200,000 for R&D, you could improve 2 process steps 15% each (you choose which ones) and that this would recover the capital equipment expense in less than 12 months. Is this possible?

You will finance everything except R&D, which has its own internal funding. Your company’s policy for profit is 45% on sell price. What are you going to recommend? Provide a comprehensive solution to prove or disprove your assertion. I expect to see calculations…..meaning ones relevant to what you have been learning lately. Answers without showing how you got them will not be counted.

Here’s some more information and advice which you may find useful:

Financing is a 6.0% annual rate; you are so confident in your plan that you will be financing over 12 months (i.e. 12 payments to pay off the loan completely)

Manufacturing equipment, such as what you are recommending, typically has a useful life of 5 years

Your company policy for equipment is to depreciate to zero

Be thorough and make sure that you have considered all factors and have listed and supported all decisions and assumptions used in your calculations

Question # 1

What is the weighted average cost of capital for a firm which has a debt-to-equity ratio of 3:7 and a beta of 2.8? The risk-free rate is 4.0% and the market risk premium is 8%; the corporate tax rate is your age in years (the tax rate is 50%).

Answer rating: 100% (QA)

WACC beta x ... View the full answer