Carded Graphics, Llc: Sheeter Replacement Decision Harvard Case Solution & Analysis

INTRODUCTION

Carded Graphics is of modest size and it is a competitor of$160 billion folding carton industry and it had a specialization in small, but highly classified orders. This business was not so complicated and reaching the niche market segments was not a big deal for the companies who were operating in this industry.

Those who were having a greater information were able to cope with the demand of the clients. Despite this, the speed and as well as the quality were both having a great significance in the competition, how ever there was not much difference in the prices that were charged by other companies operating in the same sector.

Until the 19th century, the production of product packages was performed by the labor and it was quite time-consuming, even though it was the slow process it made a greater contribution to the quality of the products being produced.Due to the increase in the population there was a greater pressure of competition.

The industry of folding cartons was quite capital intensive by having an average revenue of almost $300,000. Moreover, the technology that was in place was also highly well-known, but most of the research and development was having its focus on the efficiency of production. On the other hand, by taking into account the nature of the market it can be seen that the small companies that were operating in this industry were able to involve themselves in the competition quite successfully.

PROBLEM STATEMENT

Carded Graphics is based upon the replacement of the existing machine with the new machine. In this case, Murray Pitts, who is the owner of the growing carton company, has to consider whether there is a need to replace the sheeter that they are using or it should be replaced with the higher capacity new sheeter.There is also a need to take into consideration the reduced waste.

CASE ANALYSIS

MARGINAL CASH FLOW & COST OF CAPITAL ANALYSIS

As per the exhibits the calculations regarding the marginal, after-tax cash flows have been performed. The period for which it is calculated is comprised of 9 years, which starts from 2009 and has an ending in 2017. Moreover, the value of initial capital expenditure has been incorporated at the end of the fiscal year 2009 and the amount of CAPEX was $700,000.

Despite this, the sales value of $14,000,000 has also been incorporated at the end of 2009 and it has been grown by taking an average of the two rates given i.e. 7.00% and 8.00%. Hence, the resulting percentage obtained is 7.50% that has been applied to the sales revenue of Carded Graphics.

Also, the cost of goods sold has been grown by a percentage of almost 2.00% and it is taken from the information available in the case. Hence, the costs of goods amounting to $1,0750,000 is growing by 2.00%. The selling and admin expenses have also been increased by a growth rate of 2.00%.

Hence, the resulting figure of earnings before interest and tax has been obtained for a period of 9 years. The value based on the additional overhead fee is taken from the case and the expenditure of $22,500 has been increased by a growth rate of 2.00%.

However, the working capital has also been incorporated by deducting the current liabilities from current assets and a growth rate of 2.00% is applied as per the case. The sales proceeds of the new sheeter amount to $120,000 and the cost savings that are made related to the avoidance of new hiring.

The amount of gain or loss based on the disposal of old sheeter has also been calculated,which provides a loss of $11,000. The interest expense has also been calculated by applying a growth rate of 2% to the interest expense of the fiscal year 2009. The amount of depreciation has also been calculated by dividing the cost of sheeter with a useful life of 5 years and by deducting a residual value of $120,000 for the cost of sheeter that is $700,000.

Hence, the resulting figure of $116,000 based on the depreciation has been obtained. Moreover, the operating cash flows before tax have been obtained for a period of 9 years. The income tax rate of 30%has to be applied to the operating cash flows before tax and it has been assumed by dividing the income tax expense of 2009 with the income before taxes...........................

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