Answer the questions required by Mini Case 12-56 located at end of Chapter 12 (reproduced bellow).Must be done on Word
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Case 12-56
Monday, April 17, 2023 3:05 PM
Case 12-56 Payback, Net Present Value, Internal Rate of Return, Effects of Differences in Sales on
Project Viability
Objective 2, 3, 4
Shaftel Ready Mix is a processor and supplier of concrete, aggregate, and rock products. The
company operates in the intermountain western United States. Currently, Shaftel has 14 cementprocessing plants and a labor force of more than 375 employees. With the exception of cement
powder, all materials (e.g., aggregates and sand) are produced internally by the company. The
demand for concrete and aggregates has been growing steadily nationally. In the West, the growth
rate has been above the national average. Because of this growth, Shaftel has more than tripled its
gross revenues over the past 10 years.
Of the intermountain states, Arizona has been experiencing the most growth. Processing plants have
been added over the past several years, and the company is considering the addition of yet another
plant to be located in Scottsdale. A major advantage of another plant in Arizona is the ability to
operate year round, a feature not found in states such as Utah and Wyoming.
In setting up the new plant, land would have to be purchased and a small building constructed.
Equipment and furniture would not need to be purchased. These items would be transferred from a
plant that opened in Wyoming during the oil boom period and closed a few years after the end of
that boom. 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. Other costs, such as the installation of a silo, well, electrical hookups, and
so on, will be incurred. No salvage value is expected. The summary of the initial investment costs by
category is as follows:
Details
An account shows the following information: Land $ 20,000, Building 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 Scottsdale plant follow:
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Details
After reviewing these data, Karl Flemming, vice president of operations, argued against the proposed
plant. Karl was concerned because the plant would earn significantly less than the normal 8.3%
return on sales. All other plants in the company were earning between 7.5 and 8.5% on sales. Karl
also noted that it would take more than 5 years to recover the total initial outlay of $582,000. In the
past, the company had always insisted that payback be no more than 4 years. The company’s cost of
capital is 10%. Assume that there are no income taxes.
Required:
1. Prepare a variable-costing income statement for the proposed plant. Compute the ratio of net
income to sales. Is Karl correct that the return on sales is significantly lower than the company
average?
2. Compute the payback period for the proposed plant. Is Karl right that the payback period is
greater than 4 years? Explain. Suppose you were told that the equipment being transferred
from Wyoming could be sold for its book value. Would this affect your answer?
3. Compute the NPV and the 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 cement that must be sold for the new plant to break even. Using
this break-even 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 break even 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.
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