ACG 3301
Capital Budgeting Project
December 1, 2015
Canadian Rocky Mountain Construction Materials (CRCM) Inc. is a processor and supplier of building
materials. The company operates mostly in Canada and the Western/Southern U.S. Currently, CRCM
has 15 cement processing plants and 375 employees. All materials are produced internally by the
company except for cement powder. The growth demand for CRCM’s construction materials has been
growing steadily especially in Texas. Because of this growth, CRCM has more than tripled its gross
revenues over the past 10 years. Many processing plants have been added to the region in the past
several years and the company is considering the addition of yet another plant to be located in El Paso.
A major advantage of locating the plant in Texas, as opposed to Montana or British Columbia, is the
ability to operate the plant year round.
In setting up the new plant, land would need to be purchased and a small building constructed.
Equipment and furniture would not need to be purchased; these items would be transferred from a
Montana plant that had closed a couple of years ago. However, the equipment needs some repair and
modifications before it can be used. The equipment has a book value of $200,000 and the furniture has
a book value of $30,000. Neither has any outside market value thus no associated opportunity cost.
Other costs such as installation of a silo, well, electrical hookups, and so on will be incurred. No salvage
is expected. The summary of the initial investment costs by category is as follows:
Land
Bldg
Equipment:
Book Value
Modifications
Furniture (book value)
Silo
Well
Electrical Hookups
General Setup
$
Total
$
20,000
135,000
200,000
20,000
30,000
20,000
80,000
27,000
50,000
582,000
Estimates concerning the operation of the El Paso Plant follow:
Life of plant & equipment
Expected annual sales( in cubic yards of cement)
Selling price (per cubic yard of cement)
Variable costs (per cubic yard of cement):
Cement
Sand and gravel
Fly ash
Admixture
Driver labor
Mechanics
Plant operations(batching & clean up)
Loader Operator
Truck parts
Fuel
Other
Total Variable Costs
Fixed Costs(annual)
Salaries
Insurance
Telephone
Depreciation*
Utilities
Total Fixed Costs
10 years
35,000yrds
$45.00
$
$
$
$
12.94
6.42
1.13
1.53
3.24
1.43
1.39
0.50
1.75
1.48
3.27
35.08
135,000
75000
5000
58,200
25,000
298,200
*Straight-line depreciation is calculated by using all initial investment costs over a 10 yr period assuming no salvage value.
After reviewing these data Maryam Murat, VP of operations, argued against the proposed plant.
Maryam was concerned because the plant would earn significantly less than the normal 8.3 percent on
sales. All other plants in the company were earnings between 7.5 percent and 8.5 percent on sales.
Maryam also noted that it would take more than five years to recover the total initial outlay of
$582,000. In the past the company had always insisted that payback be no more than four years. The
company’s cost of capital is 10 percent. Assume there are no income taxes.
Required:
1. Prepare in good form a variable-costing income statement for the proposed plant. Compute the
profit margin. Is Maryam correct that the return on sales is significantly lower than the company
average?
2. Calculate the annual cash flow and compute the payback period for the plant. Is Maryam right that
the payback period is greater than four years? Explain. Suppose you were told the equipment being
transferred from Montana could be sold for its book value. Would this affect your answer?
3. Compute the NPV and IRR for the proposed plant. Would your answer be affected if you were told
that the furniture and equipment could be sold for their book values? If so repeat the analysis with this
effect considered.
4. Compute the cubic yards of construction materials that must be sold for the new plant to breakeven.
Using this breakeven volume, compute the NPV and the IRR. Would the investment be acceptable? If
so, explain why an investment that promises to do nothing more than breakeven can be viewed as
acceptable.
5. Compute the volume of cement that must be sold for the IRR to equal the firm’s cost of capital. Using
this volume, compute the firm’s expected annual income. Explain this result.
You may complete this project alone or in groups of two if you choose. If you complete the project in
groups each group member must submit the project to dropbox. Please make sure you include the
name of both group members on your submission.
All calculations must be shown, and all financial statements must be in good form. Your answers
must be typed and free of spelling and grammar errors. The assignment must be submitted as a pdf
file via blackboard by 11:59 on Tuesday Dec 1, 2015. NO LATE ASSIGNMENTS.
