Wriston Report

...

Option 2 – Invest in retooling and refitting the Detroit plant

This option seems like the one that we have been following since the last ten years. Of course we retain 100% of our customers and employees but at the same time it will cost us 2 million dollars annually just to maintain our current profits (in this case a loss of $928000 per year). Assuming we keep doing this for next 10 years, this option has npv of negative 12.3 million dollars additional to the annual loss we would still incur. So in my opinion the benefits certainly do not outweigh the costs in this option and hence I discarded this option.

Option 3 – Build a new plant

This option results in a 36 million dollars initial investment and a salvage of 4 million dollars from the older plant, i.e. an initial cost of 32 million dollars but an annual after tax cash flow of 3 million dollars in perpetuity. If we see the NPV of this option it is still a negative 2 million dollars. So although we would also retain employees and customer base as well as reduce some of the operational inefficiencies in this option, we will not be able to recover our initial investment.

Recommendation

So the best course of action for us is to go with Option 1.

Best,

Richard.

Exhibits

- NPV Analysis

Choices

NPV assuming 10% discount rate

Close the plant and move Group 1 products to Lancaster, Group 2 products to Saginaw/Lima and close down Group 3 product line

4mn from sale – 6mn for employee termination = 2 million net one time loss and

- If group 1 is moved to Lancaster

NPV assuming one time cost of 17 mn and cashflow of 2.7 mn for next 20 years

NPV = -17 +22.98 =5.98 million

- If group 2 is moved to Saginaw

NPV assuming one time cost of 8 mn and cashflow of 1 mn for next 20 years

NPV = -8 +8.51 =0.51 mn

- If group 2 is moved to Lima

NPV assuming one time cost of 8 mn and cashflow of 0.7 mn for next 20 years

NPV = -8 +5.95 = -2.05 mn

- If group 3 closed down with closure of Plant

NPV if Group 2 is moved to Saginaw = -2+5.98+0.51=4.5 million approx.

NPV if Group 2 is moved to Saginaw = -2+5.98-2.05=2 million approx.

Invest in the plant(for 10 yrs)

2 million excess expendtiture per year = 12.3 million negative NPV

Build a new plant

-32 mn initial investment(30+6-4) +30 mn(3 m in perpetuity, NPV = 3/.1) = -2 million NPV