United Metal
Case Study Finance - EDHEC MBAUnited Metal
| |
Background
We refer to the case in the finance textbook for the details.
Throughout our efforts in determining the right decision for United Metal, our team decided to calculate the difference between the ‘Make’ or ‘Buy’ options, using the numbers given in the case. However, in order to determine the net present value (NPV) and make appropriate recommendations, a risk adjusted discount rate (rate-of-return or ‘r’) needs to be incorporated. As r has not been provided in the document, we determined the NPV using different risk adjusted discount rates in 3 separate scenarios.
The ‘Make’ decision - Numbers
* 100.000 units per year with 2.0 USD selling price worth each, cost of 0.95 USD per unit, makes an overall cost of 95.000 USD per year. * Tax savings of 1750 USD per year (depreciation of machinery of 45.000 USD over 9 years at 35%) * Warehouse investment in 4th year of 50.000 USD and from year 4th including tax savings of 700 USD per year related to this investment.
The ‘Buy’ decision - Numbers
* 100.000 units per year with 2.0 USD selling price worth each, cost of 0.83 USD per unit makes overall cost of 95.000 USD per year. * 5000 USD for selling old machinery * Purchase of new machinery for 8000 USD * Tax savings new machine of 700 USD for 4 years * Tax savings of 1750 USD for year 0 * Warehouse investment of 50.000 USD for year 3 * Tax savings for year 3 till 8 of 700 USD per year * Working capital (additional stock holding of 15.000 units at 0.83 USD per unit adding to a total of 12.450 USD in year 1, returned at year 8)
We include an additional note on the 1-year later Warehouse investment of 50.000 USD. From the information provided it remains unclear what the financial consequence is of this one-year later investment. It can be assumed this amount of money would have been invested in other projects or invested in any another sense. However,
| |
Background
We refer to the case in the finance textbook for the details.
Throughout our efforts in determining the right decision for United Metal, our team decided to calculate the difference between the ‘Make’ or ‘Buy’ options, using the numbers given in the case. However, in order to determine the net present value (NPV) and make appropriate recommendations, a risk adjusted discount rate (rate-of-return or ‘r’) needs to be incorporated. As r has not been provided in the document, we determined the NPV using different risk adjusted discount rates in 3 separate scenarios.
The ‘Make’ decision - Numbers
* 100.000 units per year with 2.0 USD selling price worth each, cost of 0.95 USD per unit, makes an overall cost of 95.000 USD per year. * Tax savings of 1750 USD per year (depreciation of machinery of 45.000 USD over 9 years at 35%) * Warehouse investment in 4th year of 50.000 USD and from year 4th including tax savings of 700 USD per year related to this investment.
The ‘Buy’ decision - Numbers
* 100.000 units per year with 2.0 USD selling price worth each, cost of 0.83 USD per unit makes overall cost of 95.000 USD per year. * 5000 USD for selling old machinery * Purchase of new machinery for 8000 USD * Tax savings new machine of 700 USD for 4 years * Tax savings of 1750 USD for year 0 * Warehouse investment of 50.000 USD for year 3 * Tax savings for year 3 till 8 of 700 USD per year * Working capital (additional stock holding of 15.000 units at 0.83 USD per unit adding to a total of 12.450 USD in year 1, returned at year 8)
We include an additional note on the 1-year later Warehouse investment of 50.000 USD. From the information provided it remains unclear what the financial consequence is of this one-year later investment. It can be assumed this amount of money would have been invested in other projects or invested in any another sense. However,