Illingham Packaging is a firm that manufactures and distributes corrugated cardboard containers. Much of its business isfocused on producing customized containers in small production runs. Over the past few years the demand for the company’s producthas been quite strong and recently the company has had to turn down some orders from its best customers due to lack of capacity. Thecompany is therefore considering expanding its capacity by purchasing a new machine, the CX700. Unfortunately, the addition of thismachine in Illingham’s plant will take several months and will partially disrupt production. The direct cost of CX700 is $1,760,000.The company has cash sufficient to purchase the machine at this price and so no outside financing is needed. If the company choosesnot to purchase the machine, it will immediately pay out this cash to shareholders in the form of dividends.
1 FIN 300 Introduction to Finance Professor Wang Illingham Packaging, Inc. Illingham Packaging is a firm that manufactures and distributes corrugated cardboard containers. Much of its business is focused on producing customized containers in small production runs. Over the past few years the demand for the company’s product has been quite strong and recently the company has had to turn down some orders from its best customers due to lack of capacity. The company is therefore considering expanding its capacity by purchasing a new machine, the CX700. Unfortunately, the addition of this machine in Illingham’s plant will take several months and will partially disrupt production. The direct cost of CX700 is $1,760,000. The company has cash sufficient to purchase the machine at this price and so no outside financing is needed. If the company chooses not to purchase the machine, it will immediately pay out this cash to shareholders in the form of dividends. The following page gives forecasts of Illingham’s current balance sheet together with forecasts of Illingham’s income for the next ten years under the assumption that Illingham does not purchase the machine. Even without the new machine, overall capacity and sales will grow due to other planned improvements in the production process for its other products and divisions. It is mid 2012 and the firm has just completed a $50,000 feasibility study to analyze the CX700 proposal. The different functional groups within the firm have produced the following estimates: • Marketing : Increased sales of $10M per year. • Operations: Cost of goods sold = 70% of revenue ($7M per year), disruption caused by installation in 2012 will decrease sales by $5M, expansion will require increased inventory on hand of $1M during the life of the project. • Human Resources: Additional personnel (sales & admin) costs of $2M per year. • Accounting: CX700 will be depreciated straight line over the 10 year life of the machine, corporate tax rate is…
Attachments:
Illingham s.pdf