Moore Manufacturing Capital Budgeting Memo

Anonymous
timer Asked: Feb 5th, 2019
account_balance_wallet $9.99

Question Description

Moore Manufacturing is currently operating at its full capacity of 15,000 units per year; however, even at full capacity, it is not able to keep up with demand for its products. Demand is estimated at 20,000 units per year, which is expected to continue for the next four years.

In order to meet demand, Moore Manufacturing is considering purchasing new equipment costing $550,000. The equipment has an expected useful life of 4 years and has an expected salvage value of $50,000. Installation of the machine is estimated to cost $45,000 before it can be used for production.

The company has made arrangements to lease a nearby warehouse for $12,000 per year over the next four years. The company will need to invest an additional $24,000 in renovations to the warehouse to make it suitable for the firm’s purposes. The lease agreement requires the company to restore the warehouse to its original condition at the end of the lease. The cost of this restoration is estimated to be $25,000.

Current operating data is as follows:

<>Per Unit
Sales price$175
variable costs
manufacturing$60
marketing$20$80
fixed costs
manufacturing$25
marketing/adm$15$40$120
Operating Income before tax$55

The purchase of the new equipment will have no effect on variable costs per unit. The current fixed costs are expected to remain the same. Current per-unit fixed costs include depreciation expenses of $5 for manufacturing and $4 for marketing and administration.

If the equipment is purchased, fixed manufacturing costs (not including depreciation on the new equipment) of $125,000 will be incurred annually. The company would need to hire an additional marketing manager to serve new customers, at a cost of approximately $100,000. The firm is expected to be in the 40% tax bracket for the next four years. Moore Manufacturing requires a minimum after-tax return of 12 percent on investments and uses straight-line depreciation.

Required:

What is the initial investment outlay?

What effect will the purchase of the new equipment have on operating profit after-tax for each of the four years?

What effect will the purchase of the equipment have on after-tax cash inflows for each of the four years?

Calculate the payback period for this investment.

Calculate the book (accounting) rate of return for the investment, based on the average book value of the investment.

Calculate the net present value NPV of the investment.

Calculate the discounted payback period for the investment.

Calculate the internal rate of return (IRR) for the investment.

Prepare a memo that summarizes your calculations and makes a recommendation regarding this investment.

Tutor Answer

JesseCraig
School: Carnegie Mellon University

Attached.

Running head: MEMO

1

CAPITAL BUDGETING MEMO
Name:
Institution affiliation:
Date:

MEMO

2
MEMO

TO:
FROM:
Date: 6th February 6, 2019
RE: CAPITAL BUDGETING
Initial investment outlay
Initial investment outlay =Purchase price of equipment + increase in working capital +
shipment and installation − disposal inflows
Initial investment outlay= $550,000 +$100000 + $45000 - $50000 = $645000
Effect of the purchase of equipment on operating profit
Sales revenue = 175 x 20000 =3500000
Operating costs = (60+20+25+15)20000 = $2400000
Depreciation = (5+4) 20000 =$180000
Incremental sales revenue cashflow = 3500-175x15000 = $875000
Cash Flow Chart:
Year 0 Year 1 Year 2
1.
2.

Sales revenue (000)

Operating costs
(000)
3. Depreciation
4. Income before tax
[1-(2+3)]
5. Taxes at 40%
6. Net income
[4-5]
7. Cash flow from
operation
[1-2-5]
8. Initial Investment
9. Changes in net
working capital
10. Total cash flow
from investment
[9+10]
11. Total cash flow
[7+10]

Year 3

Year
4
$3500 $350
0
2400 2400

-

$3500

$3500

-

2400

2400

-

180
920

180
920

...

flag Report DMCA
Review

Anonymous
Tutor went the extra mile to help me with this essay. Citations were a bit shaky but I appreciated how well he handled APA styles and how ok he was to change them even though I didnt specify. Got a B+ which is believable and acceptable.

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors