CASE STUDY 3
BENTLEY CUSTOM CERAMICS
CASE STUDY 3
BENTLEY CUSTOM CERAMICS
College:Penn State Abington
Course: Finance 301
Section: 1
Professor: Sheldon Novack
Author: Dewan Choudhury
Date:April 23, 2010
- INTRODUCTION
As businesses expand, so do their needs of operations. One of those needs for Bentley Customer Ceramics is the type of kiln to use. The choices are between twelve electric or three gas fired kilns. While the electric kiln is easier to use, it is very expensive to run. It is relatively expensive to maintain and repair. Gas fired kilns are more uniform in performance, offer greater selection, and are cheaper to run than electric fire kiln. As these are industry equipment, they are relatively deep, long-term investments. All considerations made should involve the current standing of the firm, its rate of return, and its net present value.
- METHODOLOGY
1.Ratios
2.CAPM
3.Net Present Value
1.Ratios
A. Gross Profit Margin
= Gross Profit / Sales
B. Net Profit Margin
= Net Profit / Revenue
= Net Income / Sales
Net Profit: Revenue – COGS – Operating Expense – Interest and Taxes
C. Total Asset Turnover
= Sales / Total Assets
D. Return on Total Assets
= EBIT / Total Net Assets
= EBIT / Total Assets
E. Return on Net Worth
= Net Income / Net Worth
= Net Income / (Common Stock + Capital Surplus)
Net Worth: Owner’s Equity: Assets – Liabilities: Common Stock + Capital Surplus
2.CAPM (K)
Risk Free + Beta (Expected Market Return – Risk Free Rate)
Risk free = assume 3%
3.Net Present Value
Rn (1 + R)m – Cost
Rn(1997) = $8,104
(1998) = $22,000
(1999) = $31,256
m = number of years (3)
- SOLUTION
1.RATIOS
A. Gross Profit Margin
1997 = 60.07%
1998 = 60.04%
1999 = 65.98%
B. Net Profit Margin
1997 = 26.81%
1998 = 18.20%
1999 = 28.94%
C. Total Asset Turnover
1997 = 2.54
1998 = 1.88
1999 = 1.60
D. Return on Total Assets
1997 = 70.25%
1998 = 38.83%
1999 = 48.44%
E. Return on Net Worth
1997 = 1.42
1998 = 0.83
1999 = 1.20
2.CAPM (K)
CAPM with a 3% free risk rate= 3%+.97(10%-3%)
=9.79
3.Net Present Value
Rn(1997) = $08,104
(1998) = $22,000
(1999) = $31,256
Costgas= $85,800
Costelectric= $45,800
NPVgas =($8,104(.917) + $22,000(.842) + $31,256(.772)) – $85,800
= ($7,431 + $18,524 + $24,129) – $85,800
= $50,084 – $85,800
= –$35,716
NPVelectric =(($8,104(.917) + $22,000(.842) + $31,256(.772)) – $45,800
= ($7,431 + $18,524 + $24,129) – $45,800
= $50,084 – $45,800
=$4,284
- CONCLUSION
- Total asset turnovermeasuresa firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. This area has been in decline over the last years.Gross profit margin is what remains from sales after a company pays out the cost of goods sold. It is a financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. More efficient companies will usually see higher profit margins. Net profit margin is an indication of how effective a company is at cost control. It measures how much out of every dollar of sales a company actually keeps in earnings. It is important to note that increased earnings do not necessarily mean that the net profit margin of a company is improving. The higher the net profit margin is, the more effective the company is at converting revenue into actual profit. The net profit margin is a good way of comparing companies in the same industry, since such companies are generally subject to similar business conditions. However, the net profit margins are also a good way to compare companies in different industries in order to gauge which industries are relatively more profitable. Return on total assets is a ratio that indicates of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. The greater a company's earnings in proportion to its assets (and the greater the coefficient from this calculation), the more effectively that company is said to be using its assets. This aspect of the firm has been in serious decline over the past two years.Return on net worth, or return on equity, is the amount of net incomereturnedas a percentageof shareholders equity.Return on net worth measures a corporation's profitabilityby revealing how muchprofit a company generateswith the money shareholders have invested.The RONW is usefulfor comparing the profitability of a company to that of other firms in the same industry as it measures of how well a company used reinvested earnings to generate additional earnings.
- The CAPM uses variation of discounted cash flows; only instead of giving hospital a marginal of safety by being conservative in its earnings estimates.
- The electric kiln has a net present value of $4,284 whereas the gas kiln has net present value of negative $35,716. We should reject the project with a zero or negative net value. Therefore, the recommended industry equipment to proceed with is the electric kiln.
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