FIN 5425 End of Course Case
You are a Treasury Analyst for Smith, Inc., an office supplies producer headquartered in Atlanta, GA.
Smith, Inc. is bidding on a 6-year contract to produce paper clips for the State of Georgia. The contract is
for 175 truckloads of paper clips per year. The additional volume will require installing a new production
line in its Augusta, GA facility.
The new production equipment will cost $500,000 and will cost $22,000 to install.
The project will increase raw material inventories at the plant by $218,000 and accounts payable by
$165,000. It is estimated that $39,000 of additional accounts receivable will be generated from the new
sales on this production line. Additional annual costs for labor, utilities, etc. to run the new line are
estimated to be $640,000.
The equipment will be depreciated over the life of the contract on a straight-line basis for book purposes,
as the contract will not be renewed and sales volume will go back to current levels making the equipment
useless to the company at that point. Manufacturing equipment has a seven-year life for tax purposes. At
the end of the project, it is estimated that the line can be sold for 20% of its original cost. The company’s
tax rate is 34% and its reinvestment rate is 12%.
The COO has indicated that, based on current production costs and desired margins, the bid should be at a
sales price of $5,000 per truckload. The company generally uses a required rate of return for new projects
of 14%. (No one in Treasury knows why, this is just what has always been done.)
Case Part I:
