Case 1: Global Assembly Company – Advanced Tuine Inc. Global Assembly Company (GAC) is a...

Question

Case 1: Global Assembly Company – Advanced Tu
ine Inc.
Global Assembly Company (GAC) is a manufacturer and distributor of large machinery for many companies, including those in the tu
ine industry. The firm’s customers include most of the top tu
ine makers (by total annual units) in the world. The tu
ine makers are continually searching for more advanced technological solutions to cut long-term costs and increase efficiency. One such company, Advanced Tu
ine Inc. (ATI), has been in discussions with GAC about replacing one of its blade molders with a more advanced model.
GAC’s sales manager has proposed two cash purchase alternatives for ATI’s consideration. Both would speed up blade molding times and reduce labor costs since fewer changeovers and maintenance would be required. Key financial data for the existing molder and the two proposed alternatives are summarized below.
Existing molder: Originally purchased 3 years ago at an installed cost of 375,000, it is being depreciated under the MACRS 5-year schedule. It has 5 more years of economic life. The molder can be sold now for $205,000 before taxes. If retained instead of being replaced, it can be sold at the end of 5 years (it’s remaining economic life) to net $120,000 before taxes.
New Model A: The more advanced of the two recommended alternatives, it can be purchased for $720,000 and will require $40,000 of installation costs. The 5-year MACRS depreciation schedule will be used. At the end of 5 years it’s estimated the machine could be sold to net $210,000 before taxes. Cu
ent account changes associated with the acquisition of this
molder are listed in the table below.
Cash  Accounts receivable Inventory  XXXXXXXXXXAccounts payable
$ 28,000 $ 88,000 $ (17,000) $ 26,000

New Model B: Purchase cost is $600,000 and installation costs are $32,000. The same 5-year MACRS depreciation schedule will be used. At the end of 5 years, the molder can be sold to net $150,000 before taxes. No effect on the firm’s cu
ent accounts is expected.
Estimated earnings before depreciation and taxes for each of the three molders (Existing, A and B) over the next 5 years is shown in the table below. ATI is subject to a corporate tax rate of 21% and cost of capital of 8%.

Questions
Use the student Excel template provided in MyCourses to complete the questions below. All work must be shown. Follow the color key provided in the template and utilize the Helpful Hints in the second sheet of the template workbook.
· 1) For each of the two proposed replacement molders, calculate: A. Initial investment B. Operating cash inflows and Incremental cash inflows C. Terminal cash flow  
· 2) Based on the data from question #1, depict in both table and timeline format the relevant cash flow stream for Model A and Model B, assuming each is terminated at the end of year 5.  
· 3) Calculate for the new molder alternatives each of the following decision methods. A. Payback period B. NPV C. IRR  
· 4) Recommend and explain which, if either, of the new molders ATI should acquire if the firm has A. unlimited funds B. capital rationing  
· 5) Assuming the cash inflows associated with Model A are considered significantly riskier than Model B, how does this impact your recommendation in question #4?

fin4414-case-1-gac-ati-student-template-maqeocua.xlsx case-1-instructions-1rj5ir4h.docx

Nitish Lath · Accepted Answer

Case 1 Template
	Case 1: Global Assembly Company – Advanced Turbine Inc.													**Not for Distribution or Posting outside of this course**
							Color Key	Follow the directions below for the color-coded cells in the template as you work through the case questions 1 - 5.
								Directly input figures as provided in the case or appropriate for that cell.
								Requires either a formula using cell references or just a cell reference.** Exception is parts E & F which require type-written responses.
								     (MUST USE CELL REFERENCES; DON'T DIRECTLY INPUT FIGURES IN THE BLUE CELLS.)
								These are answer cells prefilled with formulas/references. Do not input anything into these cells, but reference a few for some of your other formulas.
							   **Adjust format to whole dollars for any solution dollar figures appearing with cents.
	Question 1	 Read the Helpful Hints in the next sheet before starting.
			Model A		Model B			Cost of Capital
	Acquisition & Setup:							8%		5-year MACRS Depreciation
	   Purchase Price		720,000		600,000					Yr 1	20%
	   Installation Cost		40,000		32,000			Tax Rate		Yr 2	32%
	Total Cost of New		760,000		632,000			21%		Yr 3	19%
										Yr 4	12%
	After Tax Proceeds						Existing molder Original Installed Cost			Yr 5	12%
	from Sale of Existing now:							375,000		Yr 6	5%
	   Proceeds from Sale		205,000		205,000
	   Book Value		266,250		266,250					Net Working Capital Change
	   Tax on Sale		(12,863)		(12,863)					Model A			Model B
	After Tax Proceeds 		217,863		217,863					Cash	28,000		0
	Change in NWC		73,000		0					A/R	88,000		0
										Inventory	(17,000)		0
	Initial Investment		$615,138		$414,138					A/P	26,000		0
												See page 150
										Net Inc in C.A.	99,000	a Cash Outflow
										Increase Liab.	26,000	a Cash Inflow
	Operating Cash Inflows			Earnings 	Earnings	Operating	Existing Molder	Incremental 		Increase NWC	73,000		0
	Year	EBDT	Depreciation	Before Tax	After Tax	Cash Flow	Cash Flow	Cash Flow
	Existing Molder
	1	160,000	45,000	115,000	90,850	135,850					Depreciation Schedules
	2	160,000	45,000	115,000	90,850	135,850					Year 	Installed Cost	Depr. Rate	Depreciation ($)
	3	160,000	18,750	141,250	111,588	130,338				New Model A	1	760,000	20%	152,000
	4	160,000	0	160,000	126,400	126,400					2	760,000	32%	243,200
	5	160,000	0	160,000	126,400	126,400					3	760,000	19%	144,400
	6	0	0	0	0	0					4	760,000	12%	91,200
	New Model A										5	760,000	12%	91,200
	1	260,000	152,000	108,000	85,320	237,320	135,850	101,470			6	760,000	5%	38,000
	2	300,000	243,200	56,800	44,872	288,072	135,850	152,222			Total			760,000
	3	310,000	144,400	165,600	130,824	275,224	130,338	144,887
	4	340,000	91,200	248,800	196,552	287,752	126,400	161,352		New Model B	1	632,000	20%	126,400
	5	360,000	91,200	268,800	212,352	303,552	126,400	177,152			2	632,000	32%	202,240
	6	0	38,000	-38,000	-30,020	7,980	0	7,980			3	632,000	19%	120,080
	New Model B										4	632,000	12%	75,840
	1	225,000	126,400	98,600	77,894	204,294	135,850	68,444			5	632,000	12%	75,840
	2	225,000	202,240	22,760	17,980	220,220	135,850	84,370			6	632,000	5%	31,600
	3	225,000	120,080	104,920	82,887	202,967	130,338	72,

Case 1: Global Assembly Company – Advanced Turbine Inc. Global Assembly Company (GAC) is a manufacturer and distributor of large machinery for many companies, including those in the turbine industry....

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