Details of Assignment

GLOWY Limited is an automation company that puts a substantial amount of money into research and

development (R&D) before putting out a new machine, which is usually something that saves workers

time. GLOWY Limited works in the manufacturing industry as a supplier. GLOWY recently spent

$180,000 to create an automatic food processing machine called GL1. However, a few random test runs

showed that GL1 is not yet ready for the market because it sometimes has trouble separating residue

and fine output. Such rare failures necessitate a lengthy restart time. During the reset period, firms that

buy and install GL1 may lose a lot of output. Still, because of how much competition there is, GLOWY

executives want to get this machine GL1 out before any new competitor does.

A local importer will sell you the equipment you need to build the factory that will make machine GL1 for

$6,250,000. GLOWY Limited has to pay an extra $250,000 in installation fees, and the local importer

has to pay an import duty of $500,000. The plant's useful life would be five years, and for tax purposes,

it would be written off at a straight-line rate of 20% per year. At the end of this project, the plant would

be moved (sold) to another project for a fee of $700,000.

The marketing director at GLOWY Limited says that 300 units of the GL1 machine can be sold in the

first year, and that sales will drop by 25 units per year for the rest of the project. The price per unit is

expected to be $50,000. As long as the number of units made each year is at least 200, the variable

cost of making is expected to be 60% of income from sales. The fixed costs of running this factory

would be $1,800,000 per year.

GL1 will likely need an initial stock investment of $280,000 (inventory). Also, as sales go up, $180,000

will be tied up in debtors (accounts receivable), but this will be mostly made up for by a $60,000 rise in

creditors (accounts payable). The project management wants to keep the net working capital (NWC) at

the same level throughout the life of the project. This means that there will be no new investments in

NWC during the life of the project. At the end of four years, NWC will be recovered. The new plant will

be put in a factory space that is currently being used for storage. This generates a net income of $10,000

per month, but this income generated will discontinue because of the new plant. Also, when GLOWY

sells machine GL1, its annual income from automation consulting fees will go down by $30,000.

If a company buys GLOWY'S GL1 machine, it will eventually replace many of its unskilled and semi-

skilled workers with a few skilled ones in order to improve the efficiency of its production. An Association

of Labor Unions is against the firms installing GL1 because it will cause many people to lose their jobs

because they won't be able to do their jobs. In response to the Association's concerns, GLOWY's

directors have found another project that will make semi-automatic machines GL2 and will need both

semi-skilled and skilled workers. The initial total investment for this GL2 project would be the same as

the initial total investment for the GL1 project, and the expected future cash flows (after all adjustments)

for this five-year project would be as follows:

Year-1: $2,100,000; Year-2: $2,600,000; Year-3: $3,500,000; Year-4: $3,300,000; Year-5: $1,350,000

The company's weighted average cost of capital (WACC), which has been between 15% and 18%

in the past few years, is used to figure out the needed rate of return. Management has decided to use

both rates to judge this project. The tax rate for businesses is 30%. The discounted payback

period for GLOWY is expected to be 3.5 years.

Before making a final decision at the next meeting, the Chief Financial Officer (CFO) of GLOWY

Limited wants a detailed explanation of all the important parts of the machine GL1 project. The CFO

also wants a FORMAL REPORT with a detailed analysis of cash flows and explanations of the results

using proper capital budgeting procedures that are often used to evaluate projects.

Also, the CFO wants to look at the details of the comparison between GL1 and GL2 projects in terms

of the results of appropriate capital budgeting methods using both 15% and 18% required rates,

crossover rate, and all relevant factors that can help make a final decision in a separate section of the

report.