Capital Budgeting Case Analysis Ref: Curtin (#1539) 2 hours of stat/ca

There are four alternative plans available to Liquid Chemical, Inc. with respect to the production and maintenance of containers used to ship the company's chemical products. These four alternative plans are as follows:

Alternative number one is for the company to contract with Packages, Inc. to both provide the required number of new containers and to maintain existing containers as required.

Alternative number two is for the company to continue to produce the required number of new containers in the company's internal Container Department, and to have the Container Department continue to maintain existing containers as required.

Alternative number three is for the company to contract with Packages, Inc. to provide the required number of new containers, but to have the company's internal Container Department to continue to maintain existing containers as required.

Alternative number four is for the company to continue to produce the required number of new containers in the company's internal Container Department, but to contract with Packages, Inc. to maintain existing containers as required.

Net present value analyses were performed for each of the four alternative plans. In each instance, the net present value analysis is for a fiveyear period, an aftertax hurdle rate of 10 percent is assumed, and a company income tax rate of 40 percent is

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10,423.50 5 454,500(b) .621  282,244.50  Net present value  1,845,555.00 a: Equipment and GHL losses. b: Container costs, maintenance costs, and severance pay less rent savings. Alternative Number Two Total costs for new containers and the maintenance of existing containers will be $849,000 per year less the allocation of general administrative overhead of $67,500 which is simply a paper exercise, leaving a net cost of $781,500 per year. The existing GHL stock will further reduce material costs by $75,000 per year for the first three years. Thus, the net cost for each of the first three years will be $706,500. Further, there will be no equipment depreciation charge in the fifth year, reducing the net cost for that year to $721,500. Because the company's income tax rate is assumed to be 40 percent, only 60 percent of these costs ($423,900 per year for the first three years, $468,900 for the fourth year, and $432,900 for the fifth year) are included in the net present value analysis. Additionally, the company will sustain a book value loss on the sale of surplus equipment. The equipment has a current book val
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Some common words found in the essay are:
Alternative Total, Period Amount, Container Department, Packages Inc, Analyses Net, net value, net value analysis, value analysis, Chemical Inc, included net value, included net, 60 percent, Decision Choice, Equipment GHL, existing containers, container department, book value, Available Alternatives, period amount $, period amount, 40 percent, maintenance existing, income tax rate,   , ,
Approximate Word count = 1345
Approximate Pages = 5 (250 words per page)