If the Coat Fits, Wear It

1268 Words May 13th, 2012 6 Pages
|CASE: “If the Coat Fits, Wear It” |

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EXECUTIVE SUMMARY

Andy Pratt, the founder of The Innovative Sporting Goods Company, had developed a sound technique of making baseball bats and thus the company had gained a national reputation. Yet, a new machine had been developed in the industry and it makes baseball bats more durable and powerful. The ISG Company is trying to decide whether to replace the old machines with the new ones or not.

Up to now the head of
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So, we adjusted the cash flows for inflation. After adjustment, we conducted an NPV analysis by using the new cash flows. We reached a positive NPV, which means that the ISG Company should replace the old machines with the new ones. Replacement will enable the company to make more profits.

1- Basically we first have to find the incremental cash flows and then calculate the NPV. If the NPV is higher than zero; we are going to accept the Project. In order to find the cash flows we need to do the following steps:

1- Calculate the changes in revenues by finding sales revenue for both machines for ten years and subtract the old from the new for each year.

2- Calculate the changes in costs by subtracting the operating costs of old from the new and add them to the material, labor, general and administrative costs. (We have to calculate the material, labor, general and administrative costs although it remains constant because the $10 is per unit and unit changes year-by-year for each machines)

3- Calculate the depreciation for old and new machine and subtract the old from the new.

4- Calculate EBIT for each year by subtracting change in costs and depreciation from changes in revenues.

5- Calculate the taxes for each year by multiplying 35% with the EBIT for each year.

6- Calculate the Net Income by subtracting Taxes from EBIT.

7- Calculate the

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