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    United Metal: Initial Outlay (IO) Calculation

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    Marjina Binte Abbas Brishti
    United Metal is considering either keeping its current manufacturing plant or replacing it by entering into an agreement with Amalgamated Components. An analysis of the incremental cash flows of the two options was performed. The net present value of the incremental cash flows for replacing the plant is negative, indicating it would not generate positive value for the company. Specifically, the analysis found that despite initial projections that it would save enough money, replacing the plant and entering the new contract would actually result in significant losses rather than profits over the 8 year period. Therefore, the analysis shows United Metal should not pursue replacing the plant or renewing its contract with Amalgamated Components.

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    United Metal: Initial Outlay (IO) Calculation

    Uploaded by

    Marjina Binte Abbas Brishti
    28 views3 pages
    United Metal is considering either keeping its current manufacturing plant or replacing it by entering into an agreement with Amalgamated Components. An analysis of the incremental cash flows of the two options was performed. The net present value of the incremental cash flows for replacing the plant is negative, indicating it would not generate positive value for the company. Specifically, the analysis found that despite initial projections that it would save enough money, replacing the plant and entering the new contract would actually result in significant losses rather than profits over the 8 year period. Therefore, the analysis shows United Metal should not pursue replacing the plant or renewing its contract with Amalgamated Components.

    Original Description:

    financial Report

    Original Title

    639 United Metal Final

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    United Metal is considering either keeping its current manufacturing plant or replacing it by entering into an agreement with Amalgamated Components. An analysis of the incremental cash flows of the two options was performed. The net present value of the incremental cash flows for replacing the plant is negative, indicating it would not generate positive value for the company. Specifically, the analysis found that despite initial projections that it would save enough money, replacing the plant and entering the new contract would actually result in significant losses rather than profits over the 8 year period. Therefore, the analysis shows United Metal should not pursue replacing the plant or renewing its contract with Amalgamated Components.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    28 views3 pages

    United Metal: Initial Outlay (IO) Calculation

    Uploaded by

    Marjina Binte Abbas Brishti
    United Metal is considering either keeping its current manufacturing plant or replacing it by entering into an agreement with Amalgamated Components. An analysis of the incremental cash flows of the two options was performed. The net present value of the incremental cash flows for replacing the plant is negative, indicating it would not generate positive value for the company. Specifically, the analysis found that despite initial projections that it would save enough money, replacing the plant and entering the new contract would actually result in significant losses rather than profits over the 8 year period. Therefore, the analysis shows United Metal should not pursue replacing the plant or renewing its contract with Amalgamated Components.

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    You are on page 1of 3

    UNITED METAL

    United Metal has the accompanying 02 choices –

    1. Keeping the current manufacturing plant.


    2. Replacing the agreement with Amalgamated segment.

    United Metal's incremental cash flow has been set up with a specific end goal to break down whether this
    trade will make positive wealth for the organization or not.

    Initial Outlay (IO) Calculation:

    Salvage Value (SV) $5,000


    Book Value (BV) $40,000
    Tax 35%
    Net Salvage Value (NSV)
    $17,250
    NSV= SV - [(SV-BV) × Tax Rate]

    Sensor Cost $8,000


    Less: NSV $17,250
    Add: Working Capital
    $12,41,538
    [(15,000 Unit×$83) - {($1000/52) × 2 × 90}] =$1241538
    IO = CF0 $12,32,288

    1|Page
    Incremental Depreciation Calculation:

    Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8


    $ $ $ $ $ $ $ $
    Depreciation with
    5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000
    production
    Depreciation with
    2000 1,500 1,125 844 633 475 356 1,067
    purchasing
    Incremental
    (3,000) (3,500) (3,875) (4,156) (4,367) (4,525) (4,644) (3,933)
    Depreciation

    (Note: Only the incremental cost associated with the new project has been included)

    NPV Calculation for Incremental Cash Flows:

    Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 ($)
    ($) ($) ($) ($) ($) ($) ($) ($)
    IO (1,232,288)
    Savings per year 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000
    Savings from salary (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000) (1,000)
    of vacant position
    Net savings before 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000
    depreciation
    Incremental (3,000) (3,500) (3,875) (4,156) (4,367) (4,525) (4,644) (3,933)
    Depreciation
    Before tax 9,000 9,500 9,875 10,156 10,367 10,525 10,644 9,933
    Tax(35%) 3,150 3,325 3,456 3,555 3,629 3,684 3,725 3,477
    After tax 5,850 6,175 6,419 6,602 6,739 6,842 6,919 6,456
    Add: Incremental (3,000) (3,500) (3,875) (4,156) (4,367) (4,525) (4,644) (3,933)
    Depreciation
    Project Operating 2,850 2,675 2,544 2,445 2,371 2,316 2,275 2,523
    Cash flow
    Recovery from 1,241,538
    Working Capital
    CFs (1,232,288) 2,850 2,675 2,544 2,445 2,371 2,316 2,275 1,244,062
    NPV (933,711)
    Cut off Rate 20%

    2|Page
    NPV @ 20% Discount Rate: ($ 9,33,711)

    In light of the over calculation about incremental CF, the NPV is negative which is not a great
    arrangement to the organization. This specifies that this one task does not produce wealth to the company
    and should not make financed.

    It is likewise clear starting with the analysis that despite the fact that on the viewpoint it looked
    similar to the undertaking will spare enough for the organization as stated by the creation supervisor of
    united Metal, this new adjustment Furthermore contract choice will produce a great measure of wealth for
    the organization. In fact, the obtaining administrator might have been not right also that is the reason United
    Metal if not seek after the choice from claiming obtaining the part instead of producing, Also should not try
    to a renew contract with the Amalgamated Components as this adjustment and contract choice won't
    generally make enough wealth for United Metal.

    3|Page

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