[Claudinea1]

ACG 3301Capital Budgeting Project
December 1, 2015
Canadian Rocky Mountain Construction Materials (CRCM) Inc. is a processor and supplier of building materials. The company operates mostly in Canada and the Western/Southern U.S. Currently, CRCM has 15 cement processing plants and 375 employees. All materials are produced internally by the company except for cement powder. The growth demand for CRCM’s construction materials has been growing steadily especially in Texas. Because of this growth, CRCM has more than tripled its gross revenues over the past 10 years. Many processing plants have been added to the region in the past several years and the company is considering the addition of yet another plant to be located in El Paso. A major advantage of locating the plant in Texas, as opposed to Montana or British Columbia, is the ability to operate the plant year round.
In setting up the new plant, land would need to be purchased and a small building constructed. Equipment and furniture would not need to be purchased; these items would be transferred from a Montana plant that had closed a couple of years ago. However, the equipment needs some repair and modifications before it can be used. The equipment has a book value of $200,000 and the furniture has a book value of $30,000. Neither has any outside market value thus no associated opportunity cost. Other costs such as installation of a silo, well, electrical hookups, and so on will be incurred. No salvage is expected. The summary of the initial investment costs by category is as follows:
Land
$ 20,000
Bldg
135,000
Equipment:
Book Value
200,000
Modifications
20,000
Furniture (book value)
30,000
Silo
20,000
Well
80,000
Electrical Hookups
27,000
General Setup
50,000
Total
$ 582,000

Estimates concerning the operation of the El Paso Plant follow:
Life of plant & equipment
10 years

Expected annual sales( in cubic yards of cement)
35,000yrds
Selling price (per cubic yard of cement)
$45.00

Variable costs (per cubic yard of cement):
Cement
$ 12.94
Sand and gravel
6.42
Fly ash
1.13
Admixture
1.53
Driver labor
3.24
Mechanics
1.43
Plant operations(batching & clean up)
1.39
Loader Operator
0.50
Truck parts
1.75
Fuel
1.48
Other
3.27
Total Variable Costs
$ 35.08

Fixed Costs(annual)
Salaries
$ 135,000
Insurance
75000
Telephone
5000
Depreciation*
58,200
Utilities
25,000
Total Fixed Costs
$ 298,200

*Straight-line depreciation is calculated by using all initial investment costs over a 10 yr period assuming no salvage value.

After reviewing these data Maryam Murat, VP of operations, argued against the proposed plant. Maryam was concerned because the plant would earn significantly less than the normal 8.3 percent on sales. All other plants in the company were earnings between 7.5 percent and 8.5 percent on sales. Maryam also noted that it would take more than five years to recover the total initial outlay of $582,000. In the past the company had always insisted that payback be no more than four years. The company’s cost of capital is 10 percent. Assume there are no income taxes.

Required:
1. Prepare in good form a variable-costing income statement for the proposed plant. Compute the profit margin. Is Maryam correct that the return on sales is significantly lower than the company average?
2. Calculate the annual cash flow and compute the payback period for the plant. Is Maryam right that the payback period is greater than four years? Explain. Suppose you were told the equipment being transferred from Montana could be sold for its book value. Would this affect your answer?
3. Compute the NPV and IRR for the proposed plant. Would your answer be affected if you were told that the furniture and equipment could be sold for their book values? If so repeat the analysis with this effect considered.
4. Compute the cubic yards of construction materials that must be sold for the new plant to breakeven. Using this breakeven volume, compute the NPV and the IRR. Would the investment be acceptable? If so, explain why an investment that promises to do nothing more than breakeven can be viewed as acceptable.
5. Compute the volume of cement that must be sold for the IRR to equal the firm’s cost of capital. Using this volume, compute the firm’s expected annual income. Explain this result.

[smoothy]

Sorry, we don't simply do your assignments for you. Show us your work and what you have and where you are stuck... and then we can help.

You cut and pasted the assignment... but failed to cut and paste your answers and work.

[Claudinea1]

Sorry, we don't simply do your assignments for you. Show us your work and what you have and where you are stuck... and then we can help.

You cut and pasted the assignment... but failed to cut and paste your answers and work.

I already did question one I'm just stuck on the other 4 questions

[teacherjenn4]

We need you to show us what you've done so far, and where you're stuck.