Details of Assignment
MAJESTIC Corporation is an automation company that invests much in research and development (R&D) before releasing a new machine, which is usually a labor-saving innovation. MAJESTIC Corporation is a provider to the manufacturing sector. MAJESTIC recently spent $280,000 to develop the ME1 automatic food processing equipment; nevertheless, the ME1 machine is not yet market-ready due to occasional faults in segregating residue and fine output, as demonstrated by a few random trial runs. Such rare failures demand a lengthy restart period. Companies that purchase and install ME1 may experience considerable output losses during the reset phase. Despite this, MAJESTIC management wants to introduce this machine ME1 ahead of any new competitor offering due to the severe competition.

A local importer can be approached to purchase the necessary machinery for a price of $6,350,000 in order to construct the facility required to manufacture machine ME1. MAJESTIC Corporation is responsible for an additional installation fee payment of $150,000, while the local importer is responsible for an import duty payment of $400,000. The economic life of the plant would be five years, and for purposes of taxation, it would be depreciated at a straight-line rate of twenty percent per year. At the conclusion of this project, the plant would be sold (or transferred) to another project for a fee of $700,000. This project will entail start-up expenses of $100,000.
The marketing manager for MAJESTIC Corp predicts that 300 units of the machine ME1 can be sold in the first year.

After that, sales will drop by 25 units each year for the duration of the project. The price per unit that is likely to sell is $50,000. The variable cost of making the product should be 60% of the sales income as long as at least 200 units are made each year. Annual fixed overhead costs for this business would be $1,800,000. It is estimated that ME1 will need an initial investment of $300,000 in stock. Also, as sales go up, $190,000 will be stuck in debtors (accounts receivable). This will be mostly cancelled out by an increase of $90,000 in creditors (accounts due).

Project managers plan to keep net working capital (NWC) at the same level throughout the project’s life (i.e., they won’t be investing any more in NWC during the project’s life) and then get NWC back after four years. The new plant will take up space in the factory that is currently being used for storage. The storage business makes $8,000 a month, but it will have to stop when the plant is installed. Also, selling machine ME1 will cause MAJESTIC’s annual automation consulting fee income to drop by $54,000. Firms that adopt MAJESTIC’s ME1 machine will ultimately substitute many of their unskilled and semi-skilled workers with a few skilled workers to increase production efficiency.

An Association of Labour Unions opposes the firms’ expected installation of ME1 since it will result in many individuals losing their jobs due to incompetence. In response to the Association’s worries, MAJESTIC’s managers found another project that would build the semi-automatic machine ME2, which would necessitate both semi-skilled and skilled workers. The initial total investment for this ME2 project would be the same as the initial total investment for the ME1 project, and the following are the projected future cash flows (after all adjustments) for this five-year project:

Year-1: $2,100,000; Year-2: $2,600,000; Year-3: $3,500,000;
Year-4: $3,300,000; Year-5: $1,400,000;

The required rate of return is determined using the company’s WACC, which has lately varied from 13% to 19%. Management has opted to use both rates to evaluate this project. Corporate taxation is 30%. MAJESTIC has a predicted discounted payback duration of 3.5 years.

Prior to making a definitive decision at the upcoming meeting, the Chief Financial Officer (CFO) of MAJESTIC Corp requires a comprehensive explanation of all pertinent machine ME1 project issues. In addition, the CFO requests a FORMAL REPORT containing a detailed analysis of cash flows and explanations of results using appropriate capital budgeting procedures that are frequently employed in project evaluation.

Besides, the CFO expresses a desire to examine and compare the ME1 and = ME2 projects. This examination will focus on the outcomes derived from suitable capital budgeting techniques, employing both a required rate of 13% and 19%. Additionally, the CFO seeks an analysis of the crossover rate and all pertinent factors that can contribute to the formulation of a conclusive decision. These findings will be presented in a separate section of the report.

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