Magic Timber and Steel Case
Autor: utkinanataliia13 • January 15, 2018 • Case Study • 496 Words (2 Pages) • 4,987 Views
Case: Magic Timber and Steel: Investment Evaluation with Net Present Value
Task:
- we should decide if we invest to the new machinery or not
- which consequences would we have after both decisions
- we should forecast the future situation of the company based on NPV method
Current situation of the Magic:
- steady decreasing of revenues from 2011 (Exhibit 1)
- troubles with existing machine
- huge number of competitors
- decreasing of revenues according to forecast 2016-2018 (Exhibit 2)
To calculate NPV for both situations (use the old machine and buy the new one):
- we should know how much cash we will spend during next 5 years in case of buying or not buying new machine (numbers are provided in the case);
- discount rate (to be true I had problem to define this rate, so I checked the file «Net Present Value» that was given us in class and found the following info:
«If shareholders expect a 10% return, that is the discount rate the company will use to calculate NPV. If the firm pays 4% interest in its debt, then it may use that figure as the discount rate. Typically, the CFO’s office sets the rate.»
So I’ve made an assumption that the discount rate for this case is 6%.
OLD MACHINE
- pay immediately 28.000
- large scheduled service on the 3d Year - 4.000
- regular maintenance (5 years) - 7.000*5 = 35.000
- price to sell - 5.000
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
-28000 | -7000 | -7000 | -11000 | -7000 | -2000 |
Total: -62.000
NPV(calculated in Excel) = (0.06 * (-28.000) * (-7.000) * (-7.000) * (-11.000) * (-7.000) * (-2.000) = - 53 876,16
NEW MACHINE
- price of the machine - 140.000
- interest to pay (6% per year) - 140.000*0,06 = 8.400*5 = 42.000
- labour savings (30$ * 35h/w * 50w/y)/10 = 5.250 + 250$ each year = 5.500 + 5.750 + 6.000 + 6.250 = 28.750
- electricity savings (5,625$ * 24h *7d/w * 50 w/y)/10 = 4.725 + 75$ each year = 4.800 + 4.875 + 4.950 + 5.025 = 24.375
- regular maintenance 2.000 first year, next 4 years (n + 1000), where n is cost of maintenance of previous year = 20.000 (5 years)
- price to sell - 60.000
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
0 | -425 | -1100 | -1775 | -2450 | -83125 |
Total: -88.875
NPV(calculated in Excel) = (0.06 * 0 * (-425) * (-1.100) * (-1.775) * (-2.450) * (-83.125) =
- 63 138,42
From one point of view according to my calculations it’s still cheaper for Magic Timber and Steel not to buy new machine and use the old one, but from another point of view if they purchase new machine they don’t need the old one, so the year 0 they can sell it for the price 35.000, so the NPV of new machine would be 28.138,42. In this case we can say that purchase of new machine is cheaper for Magic Timber and Steel.
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