Assignment Task :

1. INTRODUCTION
Skyler Corp holds a market leading position as a boutique PCB design and manufacturing facility in the drone industry, and its custom-built PCBs are fitted in manymarket leading drones. The company was founded in 2011 by Lucy Yi, an electronic engineer who created one of the first PCBs light enough and small enough to fit in adrone. Today her company employs 13 people in its PCB design office in Melbourne and 17 people in a manufacturing facility in Vietnam.
Skyler Corp plans to expand its capacity and growth through the acquisition of a new printed circuit board (PCB) machine to meet the firm’s current and future needs for the next 5 years. The firm’s current PCB machine helped the firm achieve its current market-leading position; however, the firm has recently been struggling to keep up with customer demand. After visiting an electronics industry trade fair in Kuala Lumpur, Lucy Yi has identified two high-capacity PCB machines, either of which could complement or replace the current machine.
Kyle Harrington, the firm’s production manager, has the task of preparing a capital budgeting report to help decide which of the competing alternative machines to invest in. Like Lucy Yi, he too is an electronic engineer, however he recently completed a postgraduate business management course where he learned the techniques required to prepare such a capital budgeting report, including:
• the development of incremental cash flows:

  • initial investment cash flows
  • the calculation of incremental operating cash flows
  • the calculation of terminal cash flows

• and using these to estimate:

  • the payback period (PB)
  • the net present value (NPV

 

2. QUESTIONS
1.
a.
What is the EAR for the loan Skyler will use to fund the new machine?
b. What is Skyler’s quarterly payment to the bank?
c. How much interest will Skyler have paid over the life of the loan?
d. Assuming Skyler operates in a normal market, how will interest payments impact the NPV estimates for the new machine?

2. 
a
. What are the annual (Year 0 to Year 6) MACRS depreciation expenses for each of the machines (the old PCB machine, PCB A, and PCB B)?
b. What are the machines’ book values at the end of each year?

3.  
a
. What are the initial (Year 0) cashflows for PCB A and PCB B, assuming the old PCB machine is sold in Year 0 for $370,000?
b. What are the after-tax salvage values for PCB A and PCB B in Year 6?

4. 
Assuming the old PCB machine is not sold, what are the free cash flows for PCB A and PCB B for Years 0 to 6?

5. 
Using the results from question 4, estimate the following for each of PCB A and PCB B:
a.
Payback period
b. Net Present Value (NPV)
c. Internal Rate of Return (IRR)
d. Profitability index

6. 
Which of the new PCB machines should Kyle Harrington recommend to Lucy Yi for investment and why?

 

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  • Posted on : January 19th, 2018

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