MBA 509 Summer II 2014 Capital Budgeting Case Read the case very carefully.

MBA 509 Summer II 2014 Capital Budgeting Case

Read the case very carefully. Nearly every statement I make has a specific purpose. I use very little "filler" material. Look for the purpose / implications of all of the content you are given within the case. You need to think carefully and with well-rounded diligence. I need to see true insight in your quantitative and qualitative responses. I want you, at a minimum (note the use of the word minimum) to address the baseline requirements of the board of directors (given to you at the end of the case) but as we discussed in class remember to anticipate the logical questions that you might get when you (in real practice) deliver your findings. Within reason, anticipate and address these logical questions. The bar is raised on the grading for this one. Show me your best MBA level effort. Proof thoroughly.

BACKGROUND

Carter Enterprises Inc. is considering a capital investment of $8,000,000 to purchase a new computerized/robotic materials handling system for its warehouse and order fulfillment operations.

The firm is facing the retirement of an atypical number of skilled warehouse and order fulfillment employees and instead of hiring one new employee for each one retiree, the firm is considering hiring one new employee for each 3 retirees. The loss of manpower is expected to be offset by the efficiencies of the new automated system. In addition, the new system is expected to substantially improve inventory management and thus reduce the number and dollar amount of merchandise stock outs and the accompanying number of unhappy customers and lost sales.

DETAILED FINANCIAL FORECASTS

The forecasted, ready to place into service, cost of the new system is $8,000,000. Labor and related cost savings as well as other key forecasts are expected to be as displayed in the chart below. These amounts were provided to you by various sources and should be used in your first pass preparation. Carter expects to have a six year operational period for the equipment. At the end of year six Carter expects to sell the equipment for approximately 15% of the original in service cost. Carter has historically used a hurdle rate of 14% to evaluate capital projects. The firm's WACC is approximately 11%. The firm has never undertaken a project like this that was so dependent on the use of new technology. Existing staff does not possess the necessary technical skills to fully operate the new equipment. Between training and new hires, that expertise will hopefully be obtained. The cost of training existing staff and the to be hired technical staff is included in the values below. Many of these forecasts were developed with the help of the equipment manufacturer.

F O R E C A S T E D P R E T A X V A L U E S

Y E A R I N S E R V I C E

Forecasted Item 1 2 3 4 5 6

Labor Related Cost Savings $1,600,000 $1,670,000 $1,750,000 $1,850,000 $1,920,000 $2,000,000

Recovered Sales from

fewer stock outs 1,800,000 1,870,000 1,930,000 2,050,000 2,100,000 2,180,000

Variable Cost ratio linked

to recovered sales 60% 60% 60% 60% 60% 60%

Corporate Tax Rate 40% 40% 40% 40% 40% 40%

Depreciation Expense 620,000 1,240,000 1,240,000 1,240,000 1,240,000 1,240,000

Sale of used system 1,200,000

System upgrade expense

(fully tax deductible in year 3) 250,000

Use time period/ year "0" for the purchase price of $8,000,000

Hurdle rate used to calculate the first pass NPV 14%

BOD First Pass requirements -

(1) Prepare a well organized MS Excel schedule that displays your calculation of the project's NPV. I want first class organization and presentation.

(2) Provide commentary related to the included line items, the estimates, the outcomes - show me (the BOD) your insight quantitatively and qualitatively. Remember my comments about anticipation. Well rounded thought............show me depth of thinking / analysis.

(3) A strong / specific conclusion

Structure of the package to the BOD ( likely in the five page range - this is not a firm number.....neither a minimum or a maximum) -

Professional cover page (always remember your audience)

Intro to the project.............the purpose of your report

Summarize key assumptions - Those given to you (for the first pass) and any that you used for additional passes

Summarize key findings that will be supported by your model and your analysis / commentary

Your MS Excel file (you don't need to embed the file into your MS word document....... you can attach as an exhibit....... a separate MS Excel file is fine. Be sure to specifically link your commentary, as appropriate, to the model. Once again remember our "anticipation" discussion.

Clear conclusion with detailed reflection on the key outcomes

NOTE: Do not use comments like “See attached file for calculation, etc.”… Always provide information/number what you are talking about. Management doesn’t have time to go back and find.