INVESTMENT & FINANCING – END OF STUDIES PROJEC

Question 1

Assignment 1

Question 1

Herbal Hair is a manufacturing company that produces shampoo.

The company uses multiple machines to automate its manufacturing process.

Currently, the industrial mixer is broken, and so hourly employees must manually mix the shampoo.

The manual mixing process costs about $10,000 per month in labor for the upcoming 6 months until they get the permanent automatic machine.

Meanwhile, Herbal Hair is considering investing in a temporary robot to mix the shampoo until it receives the permanent automatic machine.

The initial cost of the robot is $60,000 which will save Herbal Hair the monthly labor costs associated with the mixing.

Monthly maintenance fees for the robot are 500$/month.

The required return is 1% per month.

Is the temporary robot worth the money or should Herbal Hair continue to manually mix the shampoo for the next 6 months?

Question 2

Question 2

Body Spice is a manufacturing company that produces liquid soap.

The company uses multiple machines to automate its manufacturing process.

Currently, the industrial mixer is broken, and so hourly employees must manually mix the liquid soap.

The manual mixing process costs about $15,000 per month in labor for the upcoming 6 months until they get the permanent automatic machine.

Meanwhile, Body Spice is considering renting in a temporary robot to mix the liquid soap until it receives the permanent automatic machine.

The monthly rental cost of the robot is $10,000 which will save Body Spice the monthly labor costs associated with the mixing.

Monthly maintenance fees for the robot are 5,000$/month.

The required return is 2% per month.

Is the temporary robot worth the money or should Body Spice continue to manually mix the liquid soap for the next 6 months?

Question 3

Question 3

Canadian Snowflake and Norwegian Snowshoe are two companies Canadian Snowflake Norwegian Snowshoe

that sell winter sports goods. Assets

Cash $ 47,500 $ 24,300

Please take a look at their Balance Sheets for the year ended Dec 31st, 2020. AR $ 21,500 $ 26,000

Prepaid Insurance $ 2,500 $ 1,800

a) Calculate all the financial ratios that you can given the information you have. Inventory $ 48,000 $ 45,500

Land $ 20,000 $ 10,000

b) Compare each financial ratio between each company. Plant Assets $ 230,000 $ 190,000

Accumulated Depreciation -$ 85,500 -$ 71,100

c) Can you come up with a conclusion? Which company is in a better Total Assets $ 284,000 $ 226,500

financial situation?

Liabilities and Equity

Liabilities:

AP $ 17,200 $ 19,000

Salaries Payable $ 1,900 $ 1,500

Notes Payable (Long-term) $ 85,000 $ 75,000

Total Liabilities $ 104,100 $ 95,500

Equity:

Common Stock $ 115,000 $ 70,000

Retained Earnings $ 64,900 $ 61,000

Total Equity $ 179,900 $ 131,000

Total Liabilities and Equity $ 284,000 $ 226,500

Question 4-a

Question 4-a

Mikael Katz is a fashion designer who sells leather goods. Currently, Mikael sells 10,000 belts a month.

At the moment, Mikael imports the leather from China. He pays $1,000 in monthly shipping fees and $5/belt. He sells each belt for $30.

Mikael is thinking of buying a machine that will help him brand the belts by engraving his MK monogram on the belt.

The machine costs $60,000 and will add value to the belts which will now sell for $40 each.

The machine has $500 monthly maintenance fees. The machine has a life of 12 months before it becomes obsolete.

The machine has a $2,000 salvage value at the end of the 12 months.

The required return is 1% per month.

Should MK invest in the machine and sell engraved belts or should MK continue selling belts with no monogram?

Question 4-b

Question 4-b

Mikael Katz decided on not buying the first machine.

He is now thinking of buying a second machine that adds a hologram on each belt.

The hologram prevents counterfeits and further adds value to the brand.

Mikael could then sell each belt for 35$.

Mikael doesn’t know how much the machine costs, but he estimates that monthly maintenance fees will be around 750$.

He also estimates that the machine has a life of 12 months before it becomes obsolete, and that it will not have a salvage value.

The required return is 1% per month.

How much money can MK spend on the second machine? What is the breakeven point?

Question 4-c

Question 4-c

Mikael Katz decided on not buying the first machine, and on not buying the second machine.

He is now thinking of buying or leasing a third machine that adds a serial number on each belt.

The serial number prevents counterfeits and further adds value to the brand.

Mikael could then sell each belt for 45$.

Mikael can buy the third machine for $75,000, and pay a $750 monthly maintenance fee.

The machine has a life of 12 months before it becomes obsolete, and that it will have a $1,000 salvage value.

Alternatively, Mikael can lease the third machine for a $2,000 monthly fee, which includes maintenance fees.

The required return is 1% per month.

Should MK buy or lease the third machine? Or neither?

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