You are a production manager for Gold Corporation, a manufacturing company that manufactures bottles of liquid soap. The equipment you are using is over 20 years old, having been purchased when liquid soap first entered the retail market. While the equipment still works, you incur $100,000 annually in maintenance expenses because the equipment is old. You presently produce 1 million cases of liquid soap per year. This soap sells for $3 per case. Given the age of the equipment, you anticipate a decline in production of 50,000 cases in each of the next five years because of breakdowns in the equipment. You have been researching new production equipment and have found a new machine that will reduce annual operating costs to $48,000 per year and allow an increase in production over the 1 million cases presently being sold by sales and marketing. In conversations with sales and marketing, management believes that they can increase sales by 1% per year for the next five years. The new machine will have a fully loaded cost of $370,000, and an expected useful life of 5 years with no salvage value. The old machine can be sold today as scrap for $5,000.
Prepare a 6-10 slide PowerPoint presentation for management to demonstrate the following:
- Develop a schedule of projected cash flows using current equipment including the reduction in future sales.
- Develop a schedule of projected cash flows using discounted cash flows for the proposed new equipment.
- Analyze the projected cash flows and evaluate the feasibility of the proposed capital investment.
- Make a recommendation on the course of action management of Gold Corporation should take regarding the capital equipment used in this manufacturing process.
Schedule of projected cash flows using current equipment is both accurate and cogent.
Schedule of discounted cash flows using current equipment is both accurate and cogent
Accurately and cogently evaluates feasibility of the proposed capital investment.
Accurate and articulate recommendation.