Could someone help me? I do not know how to do a,b, and c andwould love to see a step by step explanation
Thank you
Agrotechnica Ltd (Agrotechnica), a company that specialises inproducing fertilisers, has recently been experiencing some qualityissues with a number of its products. The company has also seen itsmarket share decline in the past year, as new competitors haveentered the market for fertilisers. The management of Agrotechnicaare currently developing an 8 year strategic plan. As part of this8 year plan, Agrotechnica is considering replacing its existingproduction line equipment with a new automated production system.The existing production line equipment has a remaining useful lifeof 8 years and if the company were to dispose of it immediately,they could sell it for £3 million. The existing production lineequipment currently has a net book value of £4.5 million (based onthe latest balance sheet figures). The existing production lineequipment will have zero disposal value in 8 yearsâ time at the endof its useful life. The average investment in working capital inorder to maintain and run the existing production line equipment is£1.5million. AF1201 â Exchange Assessment 3 The new automatedproduction system can currently be purchased for £10 million. Thenew system will require annual service and maintenance byspecialist technicians which will cost £1 million per annum.Agrotechnica estimates that there will be efficiencies fromoperating the new system in terms of fewer product defects. Thesecash savings are estimated to be £2 million per annum. The newautomated production system is expected to be used in the businessfor 8 years and has an estimated disposal value of £4 million atthe end of the 8 years. Agrotechnica estimates that the averageinvestment in working capital required to maintain and run the newsystem will be £1 million. Agrotechnica uses a 15% discountrate.
Questions: a. Calculate the net present value of purchasing thenew automated production system, rather than holding on to theexisting production line.
b) Based on your findings from part (a) above what would youadvise Agrotechnica to do? Give reasons for your answer.
c) What other non-financial factors might the directors ofAgrotechnica consider prior to making a final decision on whetheror not to replace the existing production line?
Thank you so much!
Could someone help me? I do not know how to do a,b, and c andwould love to see a step by step explanation
Thank you
Agrotechnica Ltd (Agrotechnica), a company that specialises inproducing fertilisers, has recently been experiencing some qualityissues with a number of its products. The company has also seen itsmarket share decline in the past year, as new competitors haveentered the market for fertilisers. The management of Agrotechnicaare currently developing an 8 year strategic plan. As part of this8 year plan, Agrotechnica is considering replacing its existingproduction line equipment with a new automated production system.The existing production line equipment has a remaining useful lifeof 8 years and if the company were to dispose of it immediately,they could sell it for £3 million. The existing production lineequipment currently has a net book value of £4.5 million (based onthe latest balance sheet figures). The existing production lineequipment will have zero disposal value in 8 yearsâ time at the endof its useful life. The average investment in working capital inorder to maintain and run the existing production line equipment is£1.5million. AF1201 â Exchange Assessment 3 The new automatedproduction system can currently be purchased for £10 million. Thenew system will require annual service and maintenance byspecialist technicians which will cost £1 million per annum.Agrotechnica estimates that there will be efficiencies fromoperating the new system in terms of fewer product defects. Thesecash savings are estimated to be £2 million per annum. The newautomated production system is expected to be used in the businessfor 8 years and has an estimated disposal value of £4 million atthe end of the 8 years. Agrotechnica estimates that the averageinvestment in working capital required to maintain and run the newsystem will be £1 million. Agrotechnica uses a 15% discountrate.
Questions: a. Calculate the net present value of purchasing thenew automated production system, rather than holding on to theexisting production line.
b) Based on your findings from part (a) above what would youadvise Agrotechnica to do? Give reasons for your answer.
c) What other non-financial factors might the directors ofAgrotechnica consider prior to making a final decision on whetheror not to replace the existing production line?
Thank you so much!
Related questions
Case Study â Bethesda Mining Company Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. The company operates deep mines as well as strip mines. Most of the coal mined is sold under contract, with excess production sold on the spot market. The coal mining industry, especially high-sulfur coal operations such as Bethesda, has been hard-hit by environmental regulations. Recently, however, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for high-sulfur coal. Bethesda has just been approached by Mid-Ohio Electric Company with a request to supply coal for its electric generators for the next four years. Bethesda Mining does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a strip mine in Ohio on 5,000 acres of land purchased 10 years ago for $5.4 million. Based on a recent appraisal, the company feels it could receive $7.3 million on an after-tax basis if it sold the land today. Strip mining is a process where the layers of topsoil above a coal vein are removed and the exposed coal is removed. Some time ago, the company would simply remove the coal and leave the land in an unusable condition. Changes in mining regulations now force a company to reclaim the land; that is, when the mining is completed, the land must be restored to near its original condition. The land can then be used for other purposes. As they are currently operating at full capacity, Bethesda will need to purchase additional equipment, which will cost $43 million. The equipment will be depreciated on a seven-year MACRS schedule. The contract only runs for four years. At that time the coal from the site will be entirely mined. The company feels that the equipment can be sold for 60 percent of its initial purchase price. However, Bethesda plans to open another strip mine at that time and will use the equipment at the new mine. The contract calls for the delivery of 500,000 tons of coal per year at a price of $60 per ton. Bethesda Mining feels that coal production will be 750,000 tons, 810,000 tons, 830,000 tons, and 720,000 tons, respectively, over the next four years. The excess production will be sold in the spot market at an average of $48 per ton, Variable costs amount to $21 per ton and fixed costs are $3.7 million per year. The mine will require a net working capital investment of 5 percent of sales. The net working capital (âNWCâ) will be built up in the year prior to the sales. Bethesda will be responsible for reclaiming the land at termination of the mining. This will occur in Year 5. The company uses an outside company for reclamation of all the companyâs strip mines. It is estimated the cost of reclamation will be $3.9 million. After the land is reclaimed, the company plans to donate the land to the state for use as a public park and recreation area as a condition to receive the necessary mining permits. This will occur in Year 5 and result in a charitable expense deduction of $7.3 million. Bethesda faces a 38 percent tax rate and has a 12 percent required return on new strip mine projects. Assume a loss in any year will result in a tax credit. You have been approached by the president of the company with a request to analyze the project. Calculate the payback period, profitability index, net present value, and internal rate of return for the new strip mine. Should Bethesda Mining take the contract and open the mine?
| 1. Calculate the Sales Forecast for this Project: | ||||
| Year 1 | Year 2 | Year 3 | Year 4 | |
| Tons produced | ||||
| Contract sales price | ||||
| Spot sales price | ||||
| Contract sales | ||||
| Spot sales | ||||
| Total Sales | ||||
| 2. Cash Flow Today: | ||||
| Equipment | ||||
| Land | ||||
| NWC | ||||
| Total | - | |||
| 3. Calculate the Operating Cash Flows for years 1 to 6 | ||||||
| Tons produced | ||||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | |
| Sales | ||||||
| Variable costs | ||||||
| Fixed costs | ||||||
| Depreciation | ||||||
| Earnings before tax | ||||||
| Tax | ||||||
| Net Income | ||||||
| Operating Cash Flow | ||||||
| Depreciation Calculation: | - | |||||
| Rate* | Depreciation | |||||
| Yr 1 | 14.29% | |||||
| Yr 2 | 24.49% | |||||
| Yr 3 | 17.49% | |||||
| Yr 4 | 12.49% | |||||
| Yr 5 | 8.93% | |||||
| Yr 6 | 8.92% | |||||
| Yr 7 | 8.93% | |||||
| Yr 8 | 4.46% | |||||
| 100.00% | ||||||
| *per IRS table A-1 | ||||||
