Pre-Course Work for Finance for Entrepreneurs, M1102

Hudson Ready-Mix, Inc.

Submitted by Stéphane Eros

1. Executive Summary:

Strategic Problem: Bill Hudson whom has recently taken over from his father as owner
of Hudson Ready-Mix is being offered the opportunity to purchase a new product, a
Concrete Conveyor System which may present a competitive advantage for the
company.

Technical Problem: The owner of the company needs to determine whether the
addition of this product to its trucks would be a profitable move. He therefore needs to
see at which point he will start to gain from such a purchase.

Facts:
 Hudson Ready-Mix, Inc. operates 90 ready-mix trucks in the Denver area.
 A Concrete Conveyor System (CCS) brings advantages in terms of labour
and time for specific jobs.
 High initial cost, added salaries to pay and high maintenance cost.
 Companies using the unit show low utilisation rates, 15 to 25%.

Alternative solutions:
 Increase company’s offering through additional product.
 Determine cost and time savings related to additional product.

Recommendations:
 I recommend that the company only buy a certain amount of units for
trucks which are highly used and able to work on over 5’000 Yards 2 per
year.
 It would thus be also interesting to actively encourage customers to use
the unit by promoting its time saving attributes.
In order to analyse the offer that is being offered to Mr. Hudson, we need to calculate the
effect of the investment over time and compare it to the initial amount that needs to be
put forward to acquire the product. This implies a need to calculate for each situation,
the Net Present Value (NPV). In order to do this, it is necessary to firstly go through the
Cash Flow situation of the company for each assumption as follows:

Considering 15% utilisation rate:

3000 yards2/ 15% Income Cash Flow
Revenue 13500 13500
Operating Costs (Cash) 9000 -9000
Depreciation 15000  
Revenue Tax    
Net Revenue -10500  
Net Cash Flow   4500

4000 yards2/ 15% Income Cash Flow

Revenue 18000 18000
Operating Costs (Cash) 9000 -9000
Depreciation 15000  
Revenue Tax    
Net Revenue -6000  
Net Cash Flow   9000

5000 yards2/ 15% Income Cash Flow

Revenue 22500 22500
Operating Costs (Cash) 9000 -9000
Depreciation 15000  
Revenue Tax    
Net Revenue -1500  
Net Cash Flow   13500

Considering 20% utilisation rate:

3000 yards2/ 20% Income Cash Flow
Revenue 18000 18000
Operating Costs (Cash) 10000 -10000
Depreciation 15000  
Revenue Tax    
Net Revenue -7000  
Net Cash Flow   8000
 4000 yards2/ 20% Income Cash Flow
Revenue 24000 24000
Operating Costs (Cash) 10000 -10000
Depreciation 15000  
Revenue Tax    
Net Revenue -1000  
Net Cash Flow   14000

5000 yards2/ 20% Income Cash Flow

Revenue 30000 30000
Operating Costs (Cash) 10000 -10000
Depreciation 15000  
Revenue Tax 1500 -1500
Net Revenue 3500  
Net Cash Flow   18500

Considering 25% utilisation rate:

3000 yards2/ 25% Income Cash Flow
Revenue 22500 22500
Operating Costs (Cash) 11000 -11000
Depreciation 15000  
Revenue Tax    
Net Revenue -3500  
Net Cash Flow   11500

4000 yards2/ 25% Income Cash Flow

Revenue 30000 30000
Operating Costs (Cash) 11000 -11000
Depreciation 15000  
Revenue Tax 1200 -1200
Net Revenue 2800  
Net Cash Flow   17800

5000 yards2/ 25% Income Cash Flow

Revenue 37500 37500
Operating Costs (Cash) 11000 -11000
Depreciation 15000  
Revenue Tax 3450 -3450
Net Revenue 8050  
Net Cash Flow   23050

With the above results, we can now go ahead and calculate the NPV for the different
situations.
The formula for calculation of the NPV is as follows:
We should now use the above formula for each situation:

3’000 yards2 and 15%:

NPV= (4500/1.1+4500/1.12+4500/1.13+4500/1.14+4500/1.15)-75000
NPV= 17058.54-75000= -57941.46

3’000 yards2 and 20%:

NPV= (8000/1.1+8000/1.12+8000/1.13+8000/1.14+8000/1.15)-75000
NPV= 30326.29-75000= -44673.71

3’000 yards2 and 25%:

NPV= 43594.05-75000= -31405.95

We find here already that for anything around 3’000 yards2 there is no point going
forward with the purchase of the equipment.

4’000 yards2 and 15%:

NPV= (9000/1.1+9000/1.12+9000/1.13+9000/1.14+9000/1.15)-75000
NPV= -40882.92

4’000 yards2 and 20%:

NPV= -21928.99

4’000 yards2 and 25%:

NPV= -7524

Again, we find here that the values are all negative thus meaning an uninteresting
situation.

5’000 yards2 and 15%:

NPV= (13500/1.1+13500/1.12+13500/1.13+13500/1.14+13500/1.15)-75000
NPV= --23824.38

5’000 yards2 and 20%:

NPV= -4870.44

5’000 yards2 and 25%:

NPV= 12377.64
Conclusions:

From the above analysis, we find that it only makes sense to pursue the added product
purchase for one situation where we have 5’000 yards2 and highest utilization.
As we are aware that the utilization in other companies is rather low, I would advise to
think carefully before going ahead with purchase of the item. Mr. Hudson would have to
make sure he is capable of training his staff to actively recommend usage of the item to
customers, finding places where we would effectively see time and labor savings occur.

He should therefore should he wish to go ahead only buy a certain amount of these CCS
for the few trucks he has which perform the most, in essence 5’000 yards 2 and above at
high utilization.