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    Carded Rewrite

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    Ryan Teichmann
    Murry Pitts owns Carded Graphics, which produces folding cartons. He is considering replacing his old sheeter with a new one. A new sheeter would increase capacity and efficiency while improving quality. It would give Carded Graphics a competitive edge over rivals. An NPV analysis was conducted to evaluate the investment. Replacing the sheeter had a higher NPV of $3.42 million compared to $2.89 million for refurbishing. Sensitivity analyses showed the new sheeter remained favorable even when adjusting inputs like the discount rate and paper usage. The analysis supports Pitts' belief that a new sheeter will positively impact operations long-term and is the best choice.

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    Carded Rewrite

    Uploaded by

    Ryan Teichmann
    2K views8 pages
    Murry Pitts owns Carded Graphics, which produces folding cartons. He is considering replacing his old sheeter with a new one. A new sheeter would increase capacity and efficiency while improving quality. It would give Carded Graphics a competitive edge over rivals. An NPV analysis was conducted to evaluate the investment. Replacing the sheeter had a higher NPV of $3.42 million compared to $2.89 million for refurbishing. Sensitivity analyses showed the new sheeter remained favorable even when adjusting inputs like the discount rate and paper usage. The analysis supports Pitts' belief that a new sheeter will positively impact operations long-term and is the best choice.

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    Carded Graphics NPV and Sensitivity Analysis

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    Murry Pitts owns Carded Graphics, which produces folding cartons. He is considering replacing his old sheeter with a new one. A new sheeter would increase capacity and efficiency while improving quality. It would give Carded Graphics a competitive edge over rivals. An NPV analysis was conducted to evaluate the investment. Replacing the sheeter had a higher NPV of $3.42 million compared to $2.89 million for refurbishing. Sensitivity analyses showed the new sheeter remained favorable even when adjusting inputs like the discount rate and paper usage. The analysis supports Pitts' belief that a new sheeter will positively impact operations long-term and is the best choice.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2K views8 pages

    Carded Rewrite

    Uploaded by

    Ryan Teichmann
    Murry Pitts owns Carded Graphics, which produces folding cartons. He is considering replacing his old sheeter with a new one. A new sheeter would increase capacity and efficiency while improving quality. It would give Carded Graphics a competitive edge over rivals. An NPV analysis was conducted to evaluate the investment. Replacing the sheeter had a higher NPV of $3.42 million compared to $2.89 million for refurbishing. Sensitivity analyses showed the new sheeter remained favorable even when adjusting inputs like the discount rate and paper usage. The analysis supports Pitts' belief that a new sheeter will positively impact operations long-term and is the best choice.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 8
    At a glance
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    The key takeaways are that replacing the old sheeter with a new one has a higher NPV and will increase efficiency and competitiveness in the long run.

    The two options being considered for the sheeter are refurbishing the old sheeter to extend its useful life by 9 more years or replacing it with a new sheeter that will have a useful life of 9 years.

    $2,890,426.26 (according to Exhibit 1)

    Group 3

    FIN 4596
    Sec: 004
    10/19/2014
    Ryan Teichmann
    Robert Horan
    James Mason
    Paul Graber
    Executive Summary
    Will replacing the Sheeter have a positive effect on Carded Graphics in the Long-run?
    Murry Pitts is the proud owner of Carded Graphics, LLC. Carded Graphics business lies
    in a niche market known as the Folding Carton Industry which is part of the much larger paper
    industry. Niche markets in the paper industry tend to be highly concentrated and companies need
    a strong competitive edge to outperform their competitors. In Pitts industry specifically the
    speed and quality at which he can produce his product is key. Replacing the old sheeter with the
    new one has many benefits including: Increased capacity, reducing product waste, as well as
    improving the efficiency in operation and the quality of the product. Pitts main criteria for the
    investment are that it will have a positive effect on his operations in the long-term and is
    prepared for a negative impact to annual cash flow, so long as they are reasonable. Pitts is
    already set on the idea of replacing the sheeter but it curious what the NPV and sensitivity
    analysis will say about the investment.
    In order to find the NPV of Carded Graphics if it were to buy the new sheeter versus if
    we were to not buy the sheeter, we had to first determine the discount rate. To do this we made
    several assumptions. First is that the tax rate is equal through the industry due to the competitive
    market, and that we used the tax rate from 2007 (33%) because there is an unexpected loss in
    2008 which also had an unexpected effect in 2009. The tax rate in 2009 is 18%, which does not
    make sense if we use that rate, for a large business. Carded Graphics is also a part of the
    packaging industry and we used other competitors of the packaging industry as comparables.

    Group 3
    FIN 4596
    Sec: 004
    10/19/2014
    The risk free rate is the 10 year Government Bond (3.85%) because it is the closest matching
    time frame of our project, and the market risk premium is 6%. To calculate the WACC we first
    calculated the average beta of the industry because no company has similar assets to Carded
    Graphics, and also the average debt and average equity of all the companies in the industry.
    Exhibit 5 shows how we used all of our assumptions and calculated the WACC.
    Pitts has two options: One he can refurbish the old sheeter, extending its useful life
    another 9 years; or two replace the old sheeter with a new one that will have a useful life of 9
    years. An NPV analysis of refurbishing the old machine using the WACC we calculated in the
    previous paragraph resulted in a value of $2,890,426.26 (Exhibit 1). The NPV analysis of
    replacing the old sheeter resulted in the value of $3,420,086 (Exhibit 2).
    After analyzing both projects, the best decision for Pitts is to replace the old sheeter
    because it produces a higher NPV. This investment will increase efficiency and have a positive
    effect on operations in the long-term. Carded Graphics new sheeter will give them a competitive
    edge in producing products and help them compete in the paper industry. Taking into account the
    sensitivity of WACC and the increased use of roll paper (important inputs), we find that even
    with a number of different factors, this policy is still favorable (Exhibits 3 and 4).
    Overall, we are pleased to announce the numbers back up Pitts inhibition, and that he
    should pursue the new sheeter, based on the benefits of expanded capacity and cost reduction.
    This is shown by the NPV calculations and the sensitivity analyses.

    Exhibits

    Group 3
    FIN 4596
    Sec: 004
    10/19/2014

    Group 3
    FIN 4596
    Sec: 004
    10/19/2014

    Exhibit 1 (Refurbishing old


    Sheeter)

    Group 3
    FIN 4596
    Sec: 004
    10/19/2014

    Exhibit 2 (Purchasing New


    Sheeter)

    Group 3
    FIN 4596
    Sec: 004
    10/19/2014
    Exhibit 3

    Exhibit 4

    Group 3
    FIN 4596
    Sec: 004
    10/19/2014

    Exhibit 5

    1. Solve for the beta asset


    1.24/(1+(1-.33)*.7)
    2. Solve for the project beta
    .84*(1+(1-.33)*1.8)
    3. Use CAPM to find Re.
    3.85+(.06*1.86)
    4. Find cost of debt by interest expense/outstanding debt
    Outstanding debt = line of credit + total long term debt

    Group 3
    FIN 4596
    Sec: 004
    10/19/2014

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