# Adamac Inc Harvard Case Solution & Analysis

## Adamac Inc Case Study Solution

### Evaluation of Alternatives for Expansion

In the given situation of the ADAMAC Incorporation, for running at 100% capacity, and for the owner’s willingness to operate the company at any cost, the expansion is necessary for ADAMAC to continue its growth by meeting the demands and avoiding the future risk of its operations blockade. There are various pros and cons of expansion, given below:

• Increase in the company’s net cash flows.
• Increase in the overall worth of the company.
• Increase in the total revenues of ADAMAC.
• Enabling the company to efficiently manage its rapid growth.
• Avoiding the risk of operation blockade due to machine breakdown.
• Exploration of the New Markets.
• (Rossum, 2017)

• Increase in the Overall Operating Cost.
• Low running capacity of the new machines i.e. only 40%.
• Moving Cost.
• Risk of failure in expansion if the desired demands are not achieved.

Olliver and Watts can consider the alternative option to expand their operations. The two alternatives along with the necessary calculations are as follows:

Alternative 1: Purchase a Laser Cutter Only, shift location and hire more personnel.

Alternative 2: Purchase a Laser Cutter and a Water Jet, shift location and hire more personnel.

The Net inflows and outflows of each of the alternative along with their NPV are given in the table below:

### Table 1: Cash Flows and NPV

 Computation For NPV Alternative 1 Alternative 2 Year Cash Flow Year Cash Flow 2008 -572609 2008 777851 2009 -532684 2009 335395 2010 -419378 2010 958596 2011 -220111 2011 1918789 2012 153736 2012 3439858 2013 610631 2013 5549595 NPV Alternative 1 -986957 NPV Alternative 2 12280614

Note: The Detailed Calculations of the Inflows and Outflows of Each Alternative is given in Exhibit B,and supplementary computations are given in the excel doc, attached with the report.

From the above calculations of NPV; it can be seen that Alternative 2 has a positive NPV, while Alternative 1 has a negative NPV. Positive NPV of Alternative 2 is quite potential and has a tendency to result in increased wealth for ADAMAC.(Ozyasar, 2017)

### Recommendations

After undergoing a deep analysis of qualitative advantages and disadvantages of the expansion and finding out the quantitative evaluation of each alternative for expansion, by using NPV; Alternative 2 is suitable to be recommended to ADAMAC for its expansion plan. As the company needs to have an expansion to manage the increasing demand, Alternative 2 would enable the company to meet its increasing demands, and avoid the risk of operations blockade in the future. It would also save the potential expenses of ADAMAC during an emergency.(Merritt, 2016)

### Evaluation and Recommendations of Buyout Decision

The buyout decision can be evaluated on the basis of future cash flows of the company. If the company opts for an expansion by applying the alternative 2; the expected cash flows of ADAMC from its expansion for 5 years period are given in the following Cash Budget: (C., Edwards, & Edwards, 1991)

Table 2: Cash Budget

 CASH BUDGET 2009 2010 2011 2012 2013 Cash Opening Balance 100135 912575 2513230 5273516 9739430 Add Receipts from Expansion Revenues 2436944 3582308 5265993 7741010 11379284 Total Cash Available 2537079 4494883 7779223 13014526 21118714 Less Payments: Operating Expenses 755453 1110516 1632458 2399713 3527578 Interest Expense 662098 620947 517322 256377 0 Salaries Expense 50000 50580 51167 51760 52361 Wages Expense 48000 48557 49120 49690 50266 Rent Expense 81849 82798 83758 84730 85713 Principal Payments 27106 68256 171881 432827 0 Total Payments 1624504 1981654 2505706 3275096 3715918 Cash Ending Balance 912575 2513230 5273516 9739430 17402796

From the above cash budget; it can be analyzed that the company would have a substantial amount of cash inflows if it goes for expansion. On the basis of these high positive cash flows, Ryan Olliver and Ben Watts should buyout Degena’s sharesin order to have increasing profits

### Exhibit A: SWOT Analysis

 Strengths Weaknesses Opportunities Threats ·         Unique Competitive Advantage ·         Rapid Growth ·         Diversified Revenue Resources ·         Dependence on Limited Assets ·         Low Expansion ·         Expansion ·         Technology Adoption ·         Failure of management ·         Foreign Imports ·         Increasing exchange rate

### Exhibit B: Calculations for Inflows and Outflows

 Computation For Initial Outflow Alernative 1 Alternative 2 Moving Cost 50000 50000 Cost of Machine w-1 500000 700000 Increase in Working Capital w-b 22609 27851 Total Initial Outflow 572609 777851

 Computation For Inflows: Alternative 1 2009 2010 2011 2012 2013 Revenue generated w-1 355025 521887 767174 1127745 1657785 Less: Cost of Goods Sold w-2 63905 93940 138091 202994 298401 Gross Profit 291121 427947 629082 924751 1359384 Less: Operating Expenses w-3 110058 161785 237824 349601 513913 Amortization Expense w-6 46500 46500 46500 46500 46500 Interest Expense (Loan Amortization Table) 487398 457106 380824 188734 0 Salaries Expense 50000 50580 51167 51760 52361 Wages Expense w-4 48000 48557 49120 49690 50266 Rent Expense w-5 81849 82798 83758 84730 85713 Net Inflow -532684 -419378 -220111 153736 610631
 Alternative 2 2009 2010 2011 2012 2013 2436944 3582308 5265993 7741010 11379284 438650 644815 947879 1393382 2048271 1998294 2937493 4318114 6347628 9331013 755453 1110516 1632458 2399713 3527578 65500 65500 65500 65500 65500 662098 620947 517322 256377 0 50000 50580 51167 51760 52361 48000 48557 49120 49690 50266 81849 82798 83758 84730 85713 335395 958596 1918789 3439858 5549595
 Computation For Inflows: Revenue generated w-1 Less: Cost of Goods Sold w-2 Gross Profit Less: Operating Expenses w-3 Amortization Expense w-6 Interest Expense (Loan Amortization Table) Salaries Expense Wages Expense w-4 Rent Expense w-5 Net Inflow

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