Capital Budgeting Analysis: Nakoi vs. Dakota Plywood Presses

Capital Budgeting Analysis: Nakoi vs. Dakota Plywood Presses

The Situation: Albany Building Supplies (ABS) is considering expanding its plywood production capacity by purchasing a new press. The General Manager, Thomas Wilson, has narrowed down the options to two models: the Japanese-made Nakoi and the American-manufactured Dakota. The Dakota boasts a higher production rate, lower labor costs, and better value retention, but comes at almost double the cost of the Nakoi.

The Challenge: Emily Jones, a recent hire, is tasked with evaluating the financial viability of both presses considering revised market conditions. This analysis involves factoring in a 4% annual increase in both selling price and cash costs, a 17% discount rate, and material costs running at 72% of sales.

Methodology: To determine the most financially sound option, a Net Present Value (NPV) analysis is conducted. This method involves calculating the present value of future cash flows generated by each machine, discounted at the given rate of 17%.

Data & Assumptions: The evaluation utilizes the information provided in Exhibit 1, including output per day, market price per square foot of plywood, raw material costs, labor costs, maintenance costs, overhead costs, and the after-tax market value after seven years. The analysis assumes straight-line depreciation over a seven-year time horizon and a relevant tax rate of 40%.

Results: After calculating the annual cash flows and applying the discount rate, the NPV of the Nakoi press is significantly higher than the Dakota press.

Conclusion: Despite the Dakota's advantages in production rate, labor costs, and value retention, the Nakoi press emerges as the more financially viable option due to its lower initial investment and favorable NPV.

Key Insights:

• NPV as a Decision-Making Tool: The analysis highlights the importance of using a discounted cash flow technique like NPV to make informed investment decisions.* Sensitivity to Market Conditions: The revised market conditions, including price and cost increases, significantly impact the outcome of the analysis.* Importance of Accurate Forecasting: The accuracy of forecasts, particularly regarding sales, costs, and discount rates, is crucial for reliable capital budgeting decisions.

Recommendations: Based on the NPV analysis and considering the revised market conditions, it is recommended that ABS invest in the Nakoi plywood press.