'Harding Plastic Molding Company\r'

'On January 11, 1975, the pay committee of Harding Plastic cast c whollyer (HPMC) met to find octonary superior budgeting visualises. throw at the skirmish were Robert L. Harding, President and fo downstairs, Susan Jorgensen, comptroller, and Chris Woelk, conduct of research & development. Over the yesteryear five geezerhood this committee has met every(prenominal) month to consider and make concluding judgment on only proposed capital outlays brought up for review during the period. Harding Plastic Molding Comp all was founded in 1954 by Robert L. Harding to arise plastic parts and mildew for the Detroit automakers.For the start 10 years of operations, HPMC officiateed solely as a subcontractor for the automakers, but since then has do strong efforts to diversify in an act to avoid the cyclical tasks faced by the auto industry. By 1970 this diversification search had led HPMC into the w atomic number 18 of everywhere grounds contrastive items, includ ing kitchen utensils, camera housings, phonographic and recording equipment. It to a fault led to an increase in gross r crimsonue of 500 percent during 1964 to 1974 prod. As this salient increase in sales was par all in alleled by a corresponding increase in production volume, HPMC was forced, in late 1973, to scatter production facilities.This plant and equipment expansion affect capital expenditure of approximately Rs. 10. 5 million and final resulted in an increase of production capacity of about 40 percent. Because of this increase production capacity, HPMC has made a cooperative effort to attract late line of work, and consequently, has recently entered into contracts with a large toy blind drunk and a major discount part store chain. While non-automotive related business has grown significantly, it still only re familiarises 32 percent of HPMC’s overall business.Thus, HPMC has move to solicit non-automotive business, and as a result of this effort and its i nternal research and development, the level has four coifs of mutually scoop bug outs to consider at this month’s finance committee meeting. Over the past 10 years, HPMC’s capital budgeting approach shot has evolved into a any(prenominal)what elaborate procedure in which new proposals be categorized into tierce cranial orbits †salary, research and development and safety. moulds falling into the profit or research and development argona are evaluated by using present comfort techniques.Assuming a 10% probability cost, those falling into the safety classification are evaluated in a to a greater extent congenital framework. Although research and development projects have to observe favorable results from the present nurse criteria, thither is besides a total sawhorse limit assigned to projects of this category, ordinaryly rails about Rs. 750,000 per year. This limitation was imposed by Harding primarily because of the limited availability of st ep researchers in the plastics industry. Harding felt that if more than currency than this were allocated, â€Å"We simply couldn’t find the workforce to administer them properly”.The benefits derived from safety projects, on the separate hand, are non in terms of notes flows; hence, present value methods are not employ at all in the military rating. The subjective approach used to evaluate safety projects is a result of the pragmatically difficult undertaking of quantifying the benefits from these projects into dollar terms. Thus, these projects are subjectively evaluated by a management worker committee with a limited budget. All eight projects to be evaluated in January are class as profit projects. The first set of projects listed on the meeting’s docket for examination involves the utilization of HPMC’s clearcutness equipment.Project A calls for the production of vacuum containers for thermos flask bottles produced for large discount tri ckyware chain. The containers would be manu particularured in five contrastive size and colour combination. This project would be carried out over a collar-year period, for the sales. Project B involves the manufacture of in pricey photographic equipment for a national photography outlet. Although HPMC in brief has excess plant capacity, both of these projects would practice precision equipment of which the excess capacity is limited.Thus adopting any project would tie up all precision facilities. In addition, the procure of new equipment would be both prohibitively expensive and involve a time wait of approximately two years. Thus making these projects mutually exclusive. (The money flows associated with these two projects are given in exhibit-1) Exhibit 1: CASH FLOWS |Year |Project-A |Project-B | |0 |-75,000 |-75,000 | |1 |10,000 |43,000 | |2 |30,000 |43,000 | |3 |100,000 |43,000 | |Year |Project-C |Project-D | |0 | -8,000 |-20,000 | |1 |11,000 | 25,000 | Exhibit 2: fund s FlowsThe second set of projects involves renting, computer facilities, over a unitary-year period to help in customer direction and perhaps inventory control. Project C entails the evaluation of a customer billing administration proposed by Advanced Computer Corporation. downstairs this system, all of the harbourkeeping and billing presently being through by HPMC’s accounting dept. would now be done by Advanced. In addition to obstetrical delivery cost involved in book keeping, Advanced would provide a more businesslike billing system and do a credit analysis of decrepit customers, which would be used in the rising for in-depth credit analysis.Project D is proposed by internationalistic Computer Corporation and includes a billing system similar to that offered by Advanced, and, in addition, an inventory control system that leave behind keep track of all novel significants and parts in stock and lay out when necessary, thereby reducing the likelihood of mate rial stock outs, which has become more and more frequent over the past three years. (The cash flows for these projects are given in exhibit-2).Exhibit 3: bills Flows |Year |Projects-E |Project-F | |0 |-30,000 |-271,500 | |1 |210,000 |100,000 | |2 | |100,000 | |3 | |100,000 | |4 | |100,000 | |5 | |100,000 | |6 | |100,000 | |7 | |100,000 | 8 | |100,000 | |9 | |100,000 | |10 | |100,000 | The third closing that faces the financial directors of HPMC involves a newly demonstrable and patented process for molding hard plastics. HPMC can either manufacture or market the equipment necessary to mold such plastics or they can sell the patent rights to Polyplastics Incorporated, the world’s largest producers of plastic products. (The cash flows for project E and F are shown in exhibit-3). At present, the process has not been fully tested, and if HPMC is going to market it itself, it go forth be necessary to compute this interrogation and begin production of plant facilities immedi ately.On the other hand, selling these patent rights to Polyplastics would involve only minor testing and refinements, which could be perfect within the year. Thus, a decision on the proper course of action is essential immediately. The final set of projects up for reflexion revolved around replacement of virtually of the shapery. HPMC can go in one of the two directions. Project G suggests the purchase and installation of moderately priced, extremely efficient equipment with an expected life of 5 years; project H advocates the purchase of a similarly priced, although less efficient machine with life expectancy of 10 years.The cash flows for these alternatives are shown in exhibit-4) As the meeting opened, debate immediately centered on the most subdue method for evaluating all of the projects. Harding suggested that since the projects to be considered were mutually exclusive, perhaps their unwashed capital budgeting criteria of net present value was inappropriate. He felt th at, in examining these projects, perhaps they should be more concerned with congress gainfulness of some measure of yield.Both Jorgensen and Woelk concord with Harding’s point of view, with Jorgensen advocating a positiveness index approach and Woelk preferring the use of the favorableness index would provide a benefit-cost ratio, like a shot implying relative profitability. Thus, they merely need to rank these projects and select those with the highest profitability index. Woelk agreed with Jorgensen’s point of view but suggested that the slowness of an internal rate of save would also give a measure of profitability and perhaps be somewhat easier to interpret.To catch up with the issue Harding stated that the NPV, PI and IRR approaches would needfully yield the same ranking give. EXHIBIT-4: Cash Flows |Year |Project-G |Project-H | |0 |-500,000 |-500,000 | |1 |225,000 |150,000 | |2 |225,000 |150,000 | |3 |225,000 |150,000 | |4 |225,000 |150,000 | |5 |225,000 |150,000 | |6 | |150,000 | |7 | |150,000 | |8 | |150,000 | |9 | |150,000 | |10 | |150,000 | From here the discussion turned to an appropriate approach to the problem of differing lives among mutually exclusive projects E and F and projects G and H.Woelk argued that there really was not a problem here at all, that as all of the cash flows from these projects can be determined, any of the discounted cash flows methods of capital budgeting leave behind work well, Jorgensen, on the other hand, argued that although this was true, she felt that some compensation should be made for the fact that the projects being considered did not have adapted lives. HARDING PLASTIC MOLDING COMPANY QUESTIONS 1) Was Harding conform in stating that the NPV, PI and IRR necessarily will yield the same ranking order? Under what situations might the NPV, PI, and IRR methods provide different rankings? wherefore is it possible? ) What are the NPV, PI and IRR for projects A and B? What has caused the rankin g conflicts?Should project A or B be chosen? Might your answer metamorphose if project B is a typical project in the plastic molding industry? For example, if projects for HPMC generally yield approximately 12 percent is it logical to pick out that he IRR for project is of approximately 33 percent is a correct advisement for ranking purposes? (Hint: Examine the reinvestment assumption rate) 3) What are the NPV, PI and IRR for projects C and D? Should projects C or D be chosen? Does your answer change if these projects are considered under a capital constraint?What return on the marginal Rs. 12,000 not used in project C is necessary to make one indifferent betwixt these projects under a capital ration situation? 4) What are the NPV, PI and IRR for projects E and F? Are these projects comparable flush though they have unequal lives? Why? Which project should be chosen? remove these projects are not considered under a capital constraint. 5) What are the NPV, PI and IRR for proje cts G and H? Are these projects comparable even though they have unequal lives? Which project should b e chosen? light upon that these projects are not considered under a capital constraint.\r\n'