Anderson Clayton Company - ANDERSON CLAYTON COMPANY...

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Unformatted text preview: ANDERSON CLAYTON COMPANY EQUIPMENT REPLACEMENT Anderson Clayton Company (ACC) is a multinational firm with total revenues in excess ot‘ $4 billion per year. The tirm is made up of tour maior lelSlOllS, grains, pet foods, agricultural feeds, and consumer products, Each year each divrsion submits its capital budgeting requests to ACL‘ headquarters in Kansas city Each plant witlun each division submits its own eapital requests to division headquarters approximately two months bet‘ore divisional requests are sent to Kansas City. Michael t'aschall is in charge ot‘ engineering; at the Louisville plant that primarily p 'oduces pet t'ood The plant produces both wet and dry tood tor a Wide group at pets, t‘rorn tropical fish to show dogs Michael's iol) includes determining the capital asset needs otthe plant and prepare mg the capital budget request that is sent to divrsional headquarters each year In determining the capital needs, each department Within the plant is asked to submit its requests Each request is descriptive in nature and includes the Cost of the major pieces ot equipment. A [TV(’* person comnutce, one member from each department, then meets and decides which projects seem to have the most merit, /\ complete analy sis is then prepared {or the group ol‘ projects that is selected PRODUCTION OF DRY PET FOOD .»\t the Louisvil e plant, the dry pet tood pellets are prt'iduced through an estrus-ion process The prot ess begins with the gl’tlldlllg otall grains into it meal, the dilerent grains are then mixed With other ingredients, in~ “WW-i Vitanu is, in 3~ton ttll‘LCt'S liach jiton mix is called a batch. the process ie; not ,inlike what an mdtvtdudl would dowlien littliilllg a hatch ll9 I20 PART IV CAPITAL BUDGETING ol pancake mix or bread dough Each batch is then :noved through a system ot' conveyors and elevators into a holding bin above pellet mills In the Louisville p ant there are four pellet mills, each driven by a I207 horsepower electric motor and rated at a capacity ol' 10 tons per hour. The mixed ingredients are led by a conveyor into the top olthe pellet mill where steam is added to the dry mix as a binder. The wet mixture is then torced through a fixed die. The. die is a round steel drurrr about L5 feet in diameter and about 3 inches thick. (A die looks like a car tire in size and shape ) ’t he die contains hundreds of holes all the same. diameter. Three rotating rollers roll around the inside surface ot‘ the die, forcing the in» gredrents through the holes On the outside of the die a rotating knite cuts the extruded pellets otl'at various lengths depending on the type of pet I‘ood being produced These hot pellets are then conveyed to a cooler, which cools and drys the pellets The drying process rs needed bel‘ore the pet lood is bagged to reduce the moisture; il‘ the pellets had a high moisture content betore being placed in a paper bag or a cardboard box, they would "sweat" and then mildew in the container. Alter drying, the, pellets are held in a bin above the bagging and sewrng line The bagging and sewing operation is highly automated a measured amount of the pellets is dumped into a paper bag and the bag is sewed shut, The bags are then moved on torweyors to the warehouse, where they are stacked on pallets ready lor shipping to grocery and other retail stores‘ distribution centers Currently the four pellet mills are producing an average of 400 tons of pellets per 12rhourday. The plant has two full shifts, but the pellet line runs only lz hours The mill, which is rated at 10 tons per hour, is producing only 8.3 tons per hour. The reason tor this seeming inetli ciency is that a cleaning-out process is required after each type oft‘eed is run through the dies. the cleaning process is needed to push the last ol' the previous batch out through the dies before the new batch is started, The length of each run is constrained by the amount of available floor space in the warehouse and an estimate on the amount of orders that Will be received. (A run is the number ol‘ batches of a single type of pet ['ood that is producgd before stopping and switching to another type of pet tood) The best way to achieve greater production efficiency is to have longer runs and/or produce more pellets per mill. For this reason, Michael has been looking at a new pellet mill that is produced by the Calrt’ornia Pellet Mill Company. CALIFORNIA PELLET MILL CLllil‘OI'nm l’ellet Mill Company, a major manutacturer ol’pellet mills, has introduced a new pellet mill that is rated at toe tons per hour. Based on the current production etliciency, the actual production rate would be CASE 20 ANDERSON CLAYTON COMPANY [21 8.82 tons per hour. The new pellet mills will cost $l00,000 each, includ« ing installation. it {our new mills are purchased, a one—time $l5,000 improvement in the steam line to the mills will be required. The new pellet mills would be depreciated over a five-year period according to the Moditied Acceleraton Cost Recovery System (MACRS) that was created by the Tax Reform Act of 1986. (Depreciation rates are given in Exhibit t.) The tour old machines have been fully depreciated but could be sold as junk (or $5,000 each. It the four new mills are purchased there would also be a net increase in working capital of $12,000. THE CAPITAL BUDGETING PROCESS AT ACC Among other capital projects, the plant capital budgeting committee thinks that the purchase of the new pellet mills should be given a high priority. Paschalt kTOWS that he must present any capital budgeting ref quests before the divisional capital budgeting committee. Each year he is given certain guidelines for the preparation ot‘ capital requests Among these guidelines are the specific instructions for preparing the capital budget requests. It was noted in this year’s instructions that the cost ot‘ capital l'or plant production is [5 percent and the company has a combined state. and federal tax rate. ot'jts percent for its Kentucky plants. The Louisville plant Operates five days a week and 50 weeks a year t t 0 holidays) with the pellet tine averaging 12 hours ol’ operation per day. The average sales price per ton of pet food is $280. The raw materials cost $152 per ton, and operating costs -inctuding all overhead selling, and administrative expenses “are $l08 per ton. Both sales and costs are expected to increase 6 percent per year over the sevenyear eco nomic lite ot‘ these mills /\t the end of their economic lite the mills are expected to have a salvage value ot‘ $10,000 each QUESTIONS I. Determine the initial net cash outtlow for this project 2. Determine the net cash llows (years i to 7) it‘ the new pellet mills are purchased . Calculate the NPV for the pellet mill project. . Calculate the IRR for the pellet mill project . What ts the payback for the pellet mill project“ . Should ACC invest tn the new pellet mills" NOW-Aw . jm. What magjmg hCSIdCS those presented in this curse nnght this project be unacceptablc? Ill PART |V CAPITAL BUDGETING 8. How would you respond if a member of the divisional budget com mittee made the. comment at the end ofyour presentation that he was against the project because it only made a profit of $100,00W EXHIBIT l Depreciation Rates for MACRS Property Recovery Year 3-Year 5~Year l 33 .33 96, 20 00% 2 44 45 712.00 3 148! 19 20 ‘1 7 42 1 1,52 5 l l 52 D 5776 ...
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Anderson Clayton Company - ANDERSON CLAYTON COMPANY...

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