Solved: Met All Manufacturing manufactures over 20 000

different products made from metal

Met-All Manufacturing manufactures over 20,000 different products made from metal, including
building materials, tools, and furniture parts. The manager of the Furniture Parts division has
proposed that his division expand into bicycle parts as well. The Furniture Parts division
currently generates cash revenues of $4,700,000 and incurs cash costs of $3,600,000, with an
investment in assets of $12,090,000. One-quarter of the cash costs are direct labour. The
manager estimates that the expansion of the business will require an investment in working
capital of $45,000. Because the company already has a facility, there would be no additional
rent or purchase costs for a building, but the project would generate an additional $390,000 in
annual cash overhead.

Moreover, the manager expects annual materials cash costs for bicycle parts to be $1,700,000,
and labour for the bicycle parts to be about the same as the labour cash costs for furniture
parts. The Controller of Met-All, working with various managers, estimates that the expansion
would require the purchase of equipment with a $5,000,000 cost and an expected disposal
value of $400,000 at the end of its ten-year useful life. Depreciation would occur on a straight-
line basis.

The CFO of Met-All determines the firm’s cost of capital as 12%. The CFO’s salary is
$460,000 per year. Adding another division will not change that. The CEO asks for a report on
expected revenue for the project, and is told by the marketing department that it might be able
to achieve cash revenue of $3,750,000 annually from bicycle parts. Met-All Manufacturing has a
tax rate of 30%.

REQUIRED

1. Separate the cash flows into four groups:

(1) net initial investment cash flows,

(2) cash flows from operations,

(3) cash flows from terminal disposal of investment, and

(4) cash flows not relevant to the capital budgeting problem.

2. Calculate the NPV of the expansion project and comment on your analysis.

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 Met All Manufacturing manufactures over 20 000 different products made from metal

ANSWER
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made-from-metal/

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