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Medium Go/No Go Capital Investment 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 15 minutes
Difficulty Medium
Source Cornell
50 / 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