Description Please review the materials below for Case #2 – ITW Inc. and prepare a written 3-4 paragraph summary. 2 attachmentsSlide 1 of 2attachment_1attachment_1attachment_2attachment_2.slider-slide > img { width: 100%; display: block; } .slider-slide > img:focus { margin: auto; } Unformatted Attachment Preview ITW INC. – CAPITAL PROJECT ANALYSIS FIN 3504 CASE ASSIGNMENT – FALL 2020 Company Background ITW Inc. (the “Company”) is a global packaging and material handling equipment company with manufacturing, sales and service facilities throughout North America, Europe, and Asia. It is developing a new packaging machine (“ITW1000”) that will replace industry legacy packaging machinery and targets companies in the food and beverage sector. The ITW1000 will streamline the packaging function of customer operations which will reduce costs and increase production efficiency. Company management has estimated that the overall market for ITW1000 could be about 10,000 units. Management research indicates that competitors are also developing similar types of machines. ITW1000 The ITW1000 is a high-speed sorting, labeling, packing and material handling machine. It maximizes the accuracy of the packaging and labeling operation. Its key features consist of: • • • • • • Easily adaptable to various food and beverage manufacturers’ product packaging designs Constructed of light weight and durable components which make it easy to move locations within a production facility A robotic system that is built for high-speed operations Low energy usage Can operate at maximum efficiency with minimal downtime for maintenance Low operating costs Packaging Equipment Market Overview The packaging equipment market is set to grow from its current market value of more than $38 billion to more than $47 billion by 2024, according to a new research report. The growing adoption of automation in several industrial sectors is driving growth. Technological advances provide several advantages to industries using these products in packaging applications. For instance, smart sensors offer fault detection, data collection, mobile connectivity, and remote monitoring, boosting efficiency in processes and operations performed in factories. Industries using traditional packaging equipment are focusing on substituting legacy machinery with new innovative equipment to enable mass production. 2|Page ITW INC. – CAPITAL PROJECT ANALYSIS FIN 3504 CASE ASSIGNMENT – FALL 2020 Demand for packaging equipment is primarily driven by the development of energy-efficient equipment, increasing adoption of automated packaging machines and consumer demand for personal care goods. Growing demand for packaging robots from several end-use industries is also a key factor in the packaging machinery market. These machines play a key role in ensuring product safety throughout the value chain. Equipment manufacturers are emphasizing solutions that have minimal environmental impact. High costs associated with the development and installation of packaging equipment is restricting market growth. Small companies cannot afford to purchase these machines, forcing them to implement manual packaging techniques over automated systems, leading to adoption of an equipment rental business model. In addition, increasing maintenance costs are further hindering industry demand. Periodic maintenance and checks need to be performed to ensure proper operation of the equipment. The food and beverage industry accounted for more than 55% of packaging machinery market share in 2017. The packaging equipment market has witnessed growing demand for new machinery from developing markets due to the increase in spending on a wide range of processed and ready-to-go food and beverage products. To satisfy demand, several major companies operating in the food and beverage industry are looking to expand in untapped markets by building new plants and purchasing new machinery. In addition, with changing consumer preferences, food and beverage companies are expected to introduce a range of new products that require innovative or newer packaging machinery. Packaged Food & Beverage Industry Consumer preferences reflect products with bold flavors and meal-replacing snacks. In addition, health and wellness products, particularly in the form of immunity-boosting foods, are also on consumers’ minds. Consumers are looking for nutrition-packed foods. Plant-based meats in the form of burgers and chicken nuggets will also continue to rise in favor with consumers, as well as dairy milk substitutes from almonds, soy beans, cashews, coconuts and more which have caused disruption in the traditional dairy market. Consumers continue to demand an increase for healthier, quality frozen food products to accommodate changing lifestyles, particularly for the maturing millennial generation who are now balancing building a healthy family and career. Consumers are focusing more on “clean eating” and have a strong interest in not only what a product is but how it is made and by whom. Transparency into how food is made and where will be key for food businesses. With today’s instant access to information, if consumers can’t understand or find out where and how a product is made and what’s in it, they’ll be more inclined to leave it behind in search of alternative products made by companies that have a genuine commitment to sustainability and improving the environment. Consumers will continue to demand to know more about the foods they eat. Food safety is now costing the food and beverage industry billions each year. It will be more important than ever for the industry to pinpoint safety issues immediately. Food companies will need to be mindful of waste reduction as consumers demand sustainable, transparent production and packaging in the products they purchase. Regenerative, upcycling, biodiverse and organic farming and food 3|Page ITW INC. – CAPITAL PROJECT ANALYSIS FIN 3504 CASE ASSIGNMENT – FALL 2020 production will also continue to rise per consumer demand; speed-to-market, quality control and safety must all be a part of this process. Project Details The following are the assumptions developed by the ITW1000 Production and Sales & Marketing Departments (the “Project Team”). Development Expenditures (Period 0) • The following are the expected expenses and capital expenditures: ➢ Manufacturing expenses for ten test machines – $4,450,000 (tax deductible) ➢ Engineering including salaries and wages of $2,050,000 (tax deductible) ➢ General and administrative expenses $650,000 (tax deductible) ➢ Capital expenditures for the needed manufacturing equipment $13,050,000 ▪ $9,800,000 of equipment to be depreciated under 5-year MACRS ▪ $3,250,000 of equipment to be depreciated under 3-year MACRS ▪ MACRS table are supplied ▪ At the end of year 8 it is estimated the equipment can be sold for 25% of its original cost ➢ Expenses to transport the ITW1000 to ten test customer locations and to install them for testing $35,000 per machine (tax deductible) ➢ Sales and marketing expenses of $2,425,000 ➢ Initial working capital investment of $500,000 Years 1 – 8 The Project Team determined to evaluate the ITW1000 over an eight-year life. However, it believes its economic life could be longer but concluded eight years would be conservative in evaluating the economics of the project. The Project Team has developed the following forecast assumptions. • Pricing per unit is as follows: o $765,000 per unit o $32,000 annual maintenance agreement o Both are expected to have annual price increases of 3% per year o Number of units sold: ▪ Year 1 – 50 ▪ Year 2 – 75 ▪ Year 3 – 125 ▪ Year 4 – 150 ▪ Year 5 – 170 ▪ Year 6 – 170 ▪ Year 7 – 135 ▪ Year 8 – 110 4|Page ITW INC. – CAPITAL PROJECT ANALYSIS FIN 3504 CASE ASSIGNMENT – FALL 2020 o Direct material expense per unit is expected to be $400,000 in the year of introduction and will increase 3% per year o Manufacturing labor expense: ▪ Direct labor full-time-equivalents (FTE) of 2.5 per machine at a cost of $70,000 per FTE ▪ Indirect labor FTE (1.5) per machine at a cost of $55,000 per FTE ▪ Labor costs will increase at 2.0% annually o Direct overhead will be 8.0% of direct material cost in year 1 decreasing .5% each year thereafter (i.e. year 2 – 8.0% – .5% = 7.5%) o Indirect overhead will be 3.0% of direct material cost in year 1 decreasing .25% each year thereafter o Sales and marketing expenses will be 7.5% of revenue in year 1 decreasing .75% each year thereafter o General and administrative expenses will be 5% of revenue in year 1 decreasing .5% each year there after Working capital assumptions • • • As noted above the initial working capital investment is $500,000 End of year working capital is projected to be 2.0% of the current year’s revenue At the end of year 8 the working capital accounts will be zero Other • • Marginal tax rate – 25% Required rates of return: o Cost savings projects – 10% o Product line extensions – 12% o New products – 14% Financial Planning & Analysis Department You are a financial analyst in the Company’s financial planning and analysis department. You have been assigned to the Project Team to develop a capital project analysis which will be part of the presentation made to the Company’s capital projects committee to obtain approval in order to move forward with development of ITW1000. 5|Page ITW INC. – CAPITAL PROJECT ANALYSIS FIN 3504 CASE ASSIGNMENT – FALL 2020 The committee requires a written report (Word document 2 page maximum) with supporting Excel analyses which should include: • • • • • • Overview of the project Key factors in the packaging equipment market and packaged food & beverage industry Preparation of a dynamic (i.e. formulas should be linked to assumptions) project forecast model in Excel NPV and IRR analyses The following three sensitivity analyses need to be performed: 1. At what price per unit does the NPV equal zero (use “Goal Seek” under “Data”, “What-if”, “Goal Seek”) 2. If the working capital assumption increases from 2.0% to 3.0% what is the impact on NPV/IRR 3. What if labor costs increase 3.0% annually instead of 2.0% what is the impact on NPV/IRR Explanation of your results and recommend whether to accept or reject the project and outline any risks/opportunities associated with the project that could impact the NPV/IRR MACRS Depreciation rates 6|Page ITW INC.. ITW1000 CAPITAL PROJECT ANALYSIS – FIN 3504 Year 0 Revenue Units Sales Maintenance Contracts Total Revenue Development Expenses Direct Material Labor Direct Overhead Indirect Overhead Depreciation Expense Total Cost of Goods Sold Gross Profit GP % Sales & Marketing Expense General & Administrative Expense Sale of manufacturing equipment Pre-Tax Income/(Loss) Income Tax Expense/(Savings) After-Tax Income/(Loss) Add: Depreciation Less: Capital Expenditures Less: Increment Working Capital – Use/(Source) Project Cash Flow NPV IRR Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 n/a n/a n/a – n/a n/a n/a n/a n/a n/a n/a Assumptions Price per unit Annual Maintenance Contract per unit Annual price increase Units Sold Direct Material costs per unit Direct Material costs per unit annual increase Direct Overhead as a % of Direct Material Indirect Overhead as a % of Direct Material Sales & Marketing as a % of Revenue General & Administrative as a % of Revenue Marginal Tax Rate End of Year Working Capital % of Revenue End of Year Working Capital Incremental Working Capital Residual value as a % of original cost Discount Rate n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a ITW INC.. ITW1000 CAPITAL PROJECT ANALYSIS – FIN 3504 Development Expenditures Year 0 Expenses Manufacturing Engineering General and administrative Test locations transportation/installation Sales and marketing Total Capital Expenditures Manufacturing equipment (5 year MACRS) Manufacturing equipment (3 year MACRS) Working Capital Initial funding ITW INC.. ITW1000 CAPITAL PROJECT ANALYSIS – FIN 3504 MACRS Depreciation Year 0 Capital Expenditures Manufacturing equipment (3 year MACRS) Manufacturing equipment (5 year MACRS) Depreciation MACRS rates 3 year MACRS rates 5 year MACRS rates Depreciation expense 3 year property 5 year property Total Year 1 Year 2 Year 3 Year 4 Year 5 ITW INC.. ITW1000 CAPITAL PROJECT ANALYSIS – FIN 3504 Manufacturing Labor Year 1 Year 2 Full-Time Equivalents per machine Direct Indirect Cost per Full-Time Equivalent Direct Indirect Annual Increase Manufacturing Labor per Machine Direct Indirect Total Machines Manufactured Total Labor Cost n/a Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Purchase answer to see full attachment Tags: Capital Investment Labor costs Increase Profitability Sensitivity analyses project profitability User generated content is uploaded by users for the purposes of learning and should be used following Studypool’s honor code & terms of service.

Description

Please review the materials below for Case #2 – ITW Inc. and prepare a written 3-4 paragraph summary.

2 attachmentsSlide 1 of 2attachment_1attachment_1attachment_2attachment_2.slider-slide > img { width: 100%; display: block; }
.slider-slide > img:focus { margin: auto; }

Unformatted Attachment Preview

ITW INC. – CAPITAL PROJECT ANALYSIS
FIN 3504 CASE ASSIGNMENT – FALL 2020
Company Background
ITW Inc. (the “Company”) is a global packaging and material handling equipment company with
manufacturing, sales and service facilities throughout North America, Europe, and Asia. It is
developing a new packaging machine (“ITW1000”) that will replace industry legacy packaging
machinery and targets companies in the food and beverage sector. The ITW1000 will streamline
the packaging function of customer operations which will reduce costs and increase production
efficiency. Company management has estimated that the overall market for ITW1000 could be
about 10,000 units. Management research indicates that competitors are also developing similar
types of machines.
ITW1000
The ITW1000 is a high-speed sorting, labeling, packing and material handling machine. It
maximizes the accuracy of the packaging and labeling operation. Its key features consist of:
•
•
•
•
•
•
Easily adaptable to various food and beverage manufacturers’ product packaging designs
Constructed of light weight and durable components which make it easy to move
locations within a production facility
A robotic system that is built for high-speed operations
Low energy usage
Can operate at maximum efficiency with minimal downtime for maintenance
Low operating costs
Packaging Equipment Market Overview
The packaging equipment market is set to grow from its current market value of more than $38
billion to more than $47 billion by 2024, according to a new research report. The growing adoption
of automation in several industrial sectors is driving growth. Technological advances provide
several advantages to industries using these products in packaging applications. For instance, smart
sensors offer fault detection, data collection, mobile connectivity, and remote monitoring, boosting
efficiency in processes and operations performed in factories. Industries using traditional
packaging equipment are focusing on substituting legacy machinery with new innovative
equipment to enable mass production.
2|Page
ITW INC. – CAPITAL PROJECT ANALYSIS
FIN 3504 CASE ASSIGNMENT – FALL 2020
Demand for packaging equipment is primarily driven by the development of energy-efficient
equipment, increasing adoption of automated packaging machines and consumer demand for
personal care goods. Growing demand for packaging robots from several end-use industries is also
a key factor in the packaging machinery market. These machines play a key role in ensuring
product safety throughout the value chain. Equipment manufacturers are emphasizing solutions
that have minimal environmental impact.
High costs associated with the development and installation of packaging equipment is restricting
market growth. Small companies cannot afford to purchase these machines, forcing them to
implement manual packaging techniques over automated systems, leading to adoption of an
equipment rental business model. In addition, increasing maintenance costs are further hindering
industry demand. Periodic maintenance and checks need to be performed to ensure proper
operation of the equipment.
The food and beverage industry accounted for more than 55% of packaging machinery market
share in 2017. The packaging equipment market has witnessed growing demand for new
machinery from developing markets due to the increase in spending on a wide range of processed
and ready-to-go food and beverage products. To satisfy demand, several major companies
operating in the food and beverage industry are looking to expand in untapped markets by building
new plants and purchasing new machinery. In addition, with changing consumer preferences, food
and beverage companies are expected to introduce a range of new products that require innovative
or newer packaging machinery.
Packaged Food & Beverage Industry
Consumer preferences reflect products with bold flavors and meal-replacing snacks. In addition,
health and wellness products, particularly in the form of immunity-boosting foods, are also on
consumers’ minds. Consumers are looking for nutrition-packed foods. Plant-based meats in the
form of burgers and chicken nuggets will also continue to rise in favor with consumers, as well as
dairy milk substitutes from almonds, soy beans, cashews, coconuts and more which have caused
disruption in the traditional dairy market. Consumers continue to demand an increase for healthier,
quality frozen food products to accommodate changing lifestyles, particularly for the maturing
millennial generation who are now balancing building a healthy family and career. Consumers are
focusing more on “clean eating” and have a strong interest in not only what a product is but how
it is made and by whom. Transparency into how food is made and where will be key for food
businesses. With today’s instant access to information, if consumers can’t understand or find out
where and how a product is made and what’s in it, they’ll be more inclined to leave it behind in
search of alternative products made by companies that have a genuine commitment to
sustainability and improving the environment.
Consumers will continue to demand to know more about the foods they eat. Food safety is now
costing the food and beverage industry billions each year. It will be more important than ever for
the industry to pinpoint safety issues immediately. Food companies will need to be mindful of
waste reduction as consumers demand sustainable, transparent production and packaging in the
products they purchase. Regenerative, upcycling, biodiverse and organic farming and food
3|Page
ITW INC. – CAPITAL PROJECT ANALYSIS
FIN 3504 CASE ASSIGNMENT – FALL 2020
production will also continue to rise per consumer demand; speed-to-market, quality control and
safety must all be a part of this process.
Project Details
The following are the assumptions developed by the ITW1000 Production and Sales & Marketing
Departments (the “Project Team”).
Development Expenditures (Period 0)
•
The following are the expected expenses and capital expenditures:
➢ Manufacturing expenses for ten test machines – $4,450,000 (tax deductible)
➢ Engineering including salaries and wages of $2,050,000 (tax deductible)
➢ General and administrative expenses $650,000 (tax deductible)
➢ Capital expenditures for the needed manufacturing equipment $13,050,000
▪ $9,800,000 of equipment to be depreciated under 5-year MACRS
▪ $3,250,000 of equipment to be depreciated under 3-year MACRS
▪ MACRS table are supplied
▪ At the end of year 8 it is estimated the equipment can be sold for 25% of its
original cost
➢ Expenses to transport the ITW1000 to ten test customer locations and to install
them for testing $35,000 per machine (tax deductible)
➢ Sales and marketing expenses of $2,425,000
➢ Initial working capital investment of $500,000
Years 1 – 8
The Project Team determined to evaluate the ITW1000 over an eight-year life. However, it
believes its economic life could be longer but concluded eight years would be conservative in
evaluating the economics of the project. The Project Team has developed the following
forecast assumptions.
•
Pricing per unit is as follows:
o $765,000 per unit
o $32,000 annual maintenance agreement
o Both are expected to have annual price increases of 3% per year
o Number of units sold:
▪ Year 1 – 50
▪ Year 2 – 75
▪ Year 3 – 125
▪ Year 4 – 150
▪ Year 5 – 170
▪ Year 6 – 170
▪ Year 7 – 135
▪ Year 8 – 110
4|Page
ITW INC. – CAPITAL PROJECT ANALYSIS
FIN 3504 CASE ASSIGNMENT – FALL 2020
o Direct material expense per unit is expected to be $400,000 in the year of
introduction and will increase 3% per year
o Manufacturing labor expense:
▪ Direct labor full-time-equivalents (FTE) of 2.5 per machine at a cost of
$70,000 per FTE
▪ Indirect labor FTE (1.5) per machine at a cost of $55,000 per FTE
▪ Labor costs will increase at 2.0% annually
o Direct overhead will be 8.0% of direct material cost in year 1 decreasing .5% each
year thereafter (i.e. year 2 – 8.0% – .5% = 7.5%)
o Indirect overhead will be 3.0% of direct material cost in year 1 decreasing .25%
each year thereafter
o Sales and marketing expenses will be 7.5% of revenue in year 1 decreasing .75%
each year thereafter
o General and administrative expenses will be 5% of revenue in year 1 decreasing
.5% each year there after
Working capital assumptions
•
•
•
As noted above the initial working capital investment is $500,000
End of year working capital is projected to be 2.0% of the current year’s revenue
At the end of year 8 the working capital accounts will be zero
Other
•
•
Marginal tax rate – 25%
Required rates of return:
o Cost savings projects – 10%
o Product line extensions – 12%
o New products – 14%
Financial Planning & Analysis Department
You are a financial analyst in the Company’s financial planning and analysis department. You
have been assigned to the Project Team to develop a capital project analysis which will be part of
the presentation made to the Company’s capital projects committee to obtain approval in order to
move forward with development of ITW1000.
5|Page
ITW INC. – CAPITAL PROJECT ANALYSIS
FIN 3504 CASE ASSIGNMENT – FALL 2020
The committee requires a written report (Word document 2 page maximum) with supporting Excel
analyses which should include:
•
•
•
•
•
•
Overview of the project
Key factors in the packaging equipment market and packaged food & beverage industry
Preparation of a dynamic (i.e. formulas should be linked to assumptions) project forecast
model in Excel
NPV and IRR analyses
The following three sensitivity analyses need to be performed:
1. At what price per unit does the NPV equal zero (use “Goal Seek” under “Data”,
“What-if”, “Goal Seek”)
2. If the working capital assumption increases from 2.0% to 3.0% what is the impact
on NPV/IRR
3. What if labor costs increase 3.0% annually instead of 2.0% what is the impact on
NPV/IRR
Explanation of your results and recommend whether to accept or reject the project and
outline any risks/opportunities associated with the project that could impact the NPV/IRR
MACRS Depreciation rates
6|Page
ITW INC..
ITW1000 CAPITAL PROJECT ANALYSIS – FIN 3504
Year 0
Revenue
Units Sales
Maintenance Contracts
Total Revenue
Development Expenses
Direct Material
Labor
Direct Overhead
Indirect Overhead
Depreciation Expense
Total Cost of Goods Sold
Gross Profit
GP %
Sales & Marketing Expense
General & Administrative Expense
Sale of manufacturing equipment
Pre-Tax Income/(Loss)
Income Tax Expense/(Savings)
After-Tax Income/(Loss)
Add: Depreciation
Less: Capital Expenditures
Less: Increment Working Capital – Use/(Source)
Project Cash Flow
NPV
IRR
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
n/a
n/a
n/a
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Assumptions
Price per unit
Annual Maintenance Contract per unit
Annual price increase
Units Sold
Direct Material costs per unit
Direct Material costs per unit annual increase
Direct Overhead as a % of Direct Material
Indirect Overhead as a % of Direct Material
Sales & Marketing as a % of Revenue
General & Administrative as a % of Revenue
Marginal Tax Rate
End of Year Working Capital % of Revenue
End of Year Working Capital
Incremental Working Capital
Residual value as a % of original cost
Discount Rate
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
ITW INC..
ITW1000 CAPITAL PROJECT ANALYSIS – FIN 3504
Development Expenditures
Year 0
Expenses
Manufacturing
Engineering
General and administrative
Test locations transportation/installation
Sales and marketing
Total
Capital Expenditures
Manufacturing equipment (5 year MACRS)
Manufacturing equipment (3 year MACRS)
Working Capital
Initial funding
ITW INC..
ITW1000 CAPITAL PROJECT ANALYSIS – FIN 3504
MACRS Depreciation
Year 0
Capital Expenditures
Manufacturing equipment (3 year MACRS)
Manufacturing equipment (5 year MACRS)
Depreciation MACRS rates
3 year MACRS rates
5 year MACRS rates
Depreciation expense
3 year property
5 year property
Total
Year 1
Year 2
Year 3
Year 4
Year 5
ITW INC..
ITW1000 CAPITAL PROJECT ANALYSIS – FIN 3504
Manufacturing Labor
Year 1
Year 2
Full-Time Equivalents per machine
Direct
Indirect
Cost per Full-Time Equivalent
Direct
Indirect
Annual Increase
Manufacturing Labor per Machine
Direct
Indirect
Total
Machines Manufactured
Total Labor Cost
n/a
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8

Purchase answer to see full
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Tags:
Capital Investment

Labor costs

Increase Profitability

Sensitivity analyses

project profitability

User generated content is uploaded by users for the purposes of learning and should be used following Studypool’s honor code & terms of service.