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Medium Go/No Go Financial Analysis Profitability

Benjamin Carpet

#Manufacturing
ProHub Comment

This is a multi-layered investment decision case that progresses from a simple payback analysis (Question 4) to a more complex revenue expansion scenario (Question 5). The case teaches candidates to recognize when cost savings alone are insufficient to justify a large capital investment, and to identify secondary revenue opportunities that transform the investment thesis.

Estimated Time 26 minutes
Difficulty Medium
Source Cornell
10 / 100
Your client is the family owner of a company that serves residential and commercial markets and operates 5 days/week for 16 hours/day. The owner is looking to purchase a new machine to improve its current production process.

Clarifying Information

  1. Current Production Process: Purchase colored yarn → Load correct colored yarn onto spots → Weave carpet with colored yarn → Back carpet → Cut, roll, store
  2. Considering New Process: Purchase uncolored yarn → Load spools → Weave carpet → NEW MACHINE (Inks, Dyes, Dries) → Back carpet → Cut, roll, store
  3. Machine costs $25M
  4. The new process improves costs across all areas except operations
  5. $0.50 per yard savings for yarn
  6. $0.50 per yard savings for inventory
  7. $0.25 per yard savings for labor
  8. $1.00 per yard increase for operations
  9. Annual yarn production is 10M yards
  10. Machine has useful life of 10 years
  11. New technology allows for creation of carpet with new textures and patterns which will attract high end customers
  12. Current customers pay $16 per yard
  13. New customers will pay 25% more
  14. High-end market sells 70M yards / year
  15. Benjamin Carpet will capture 5% of the high-end market
  16. 30% of current market comes from high-end customers
Mock Interview
Interviewer

Your client is the family owner of a company that serves residential and commercial markets and operates 5 days/week for 16 hours/day. The owner is looking to purchase a new machine to improve its current production process.

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
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Practice this case with AI Mock Interview

Benjamin Carpet, a carpet manufacturer, is evaluating a $25M machine investment that streamlines production by automating the dyeing process. While the machine generates only $2.5M in annual cost savings (insufficient to justify the investment), it enables entry into a high-end market segment, creating $50M in annual profit and making the investment highly attractive.

Key Insights:

  1. Cost savings alone ($0.25/yard on 10M yards = $2.5M annually) cannot justify a $25M investment even over 10 years at 0% discount rate
  2. Revenue expansion opportunities (5% capture of 70M yard high-end market at $20/yard premium) are critical to investment viability
  3. Incremental analysis requires distinguishing between existing customer revenue and new market revenue to avoid double-counting
  4. The case demonstrates the importance of exploring secondary strategic benefits (market access, product differentiation) beyond direct operational improvements