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Question;CONTENTED MILK COWS, INC. (FICTIONAL)Contented Milk Cows, Inc. (CMC) is a national distributor of dairy farm equipment withthe past years sales revenue approaching $30 million. Their present product lines include about75 products including milk cans, milking machines, milking stall equipment, cleaning supplies,etc. In addition to the small corporate offices, CMC has regional sales and service offices thatcover most milk producing areas in the U.S.Dairy farming, like most industries has evolved over the years. Originally, most farmershad 1-10 milk cows that provided their family farm with milk and cream, and the remainder wassold to a local dairy to provide money for groceries and other family expenses. Cows wereherded into small milk barns twice a day where stanchions closed around the cows head to holdthem steady while the farmer sat and milked each cow.Farms gradually became more specialized with herds of 50-100 milk cows, andeventually up to several hundred in some cases. With this, milking machines became standardthat were attached to each cow manually after the cows were herded into stanchions.Improvements were made like using rotating stanchions to lessen the required preparation andremoval time, but it still required extensive manual attention.Automation has now become available with robotic machines replacing the manual partof herding cows into the barn and milking stalls, fitting the milking machine to the cow, feeding,herding cows out of their stall, etc. With this automation, dairy farmers look at computermonitors as often as their cows. The references below provide information on robotic milkingsystems. This thirteen minute marketing video offers a good overview of the entire system:, the sales manager of CMC, recently visited the World Dairy Expo in Madison,Wisconsin and met a producer of a robotic milking system from a foreign country that is lookingfor a distributor to sell their product line in the United States. When he returned home, Andrewbroached CMCs top management with this opportunity and they asked him to prepare afinancial proposal to assist them in making a decision whether to take on this product line.Strategically, this would be a major change in their business. It is emphasized that this is aninternal proposal for CMC to consider whether to adopt this as a major addition to their productlines, not for a sales brochure to assist dairy farmers in making a decision on buying one.CMCs existing product lines are milking hardware with products requiring minimalinstallation and maintenance. This new product line will require knowledge and skills involvingelectronics and computers, a substantial change from the existing product lines. The proposedproduct will require additional storage and showroom space and additional service people.Extensive training by staff at all levels of the organization from the CEO though sales andinstallation/service employees will be needed.It is expected that the existing sales staff is sufficient to handle the sales aspect of thisnew product since there will be diminished sales for the existing product lines. Thecannibalization effect on the existing products line is to be ignored in this proposal.CENTRAL WAREHOUSEA new corporate warehouse will be needed to receive shipments form the foreignmanufacturer and service the regional offices. The central warehouse will store all the modularcomponents that compose a robotic milking system. Designs for systems will be received fromsales people and a shipment with all the required hardware will be assembled and shippeddirectly to customers where CMC staff will assemble it.The central warehouse is estimated to cost $350,000 to construct and furnish. Thewarehouse will be built on CMC owned land that has been appraised at $125,000 (opportunitycost). The warehouse should be depreciated using 20-year MACRS and is expected to have asalvage value of $550,000 at the end of 10 years. Since land is not depreciable, its book valueat the end of year 10 is still the original year 0 appraisal, and the estimated land value at the endof year 10 is $150,000. (The MARCS 20-year depreciation percentages can be found at the endof the data block.)Annual maintenance and operating cost of the warehouse, including heating and airconditioning, are estimated at $30,000 in year 0 and a constant $96,000 annually for years 1-10.The central warehouse initially (year 0) will be stocked with $200,000 of inventory. Inyear 1 and following years, inventory in all locations (central and regional) is expected to be25% of sales. Regional locations will be stocked with inventory starting in year 1.Three new hires will be needed in the central office for product design, repairconsultation, and internal training. The plan is to add one person in year 1 at an annual cost of$125,000 annually for wages and benefits. In year 3, a second employee will be added at$100,000 annually. In year 5, the third employee will be added at $75,000 annually. Wagespayable is not to be included in working capital.REGIONAL OFFICESThe 20 regional offices are leased and additional space for a demonstration capability,repair part storage, and a repair area is needed. In some cases the present regional offices canbe expanded and in others, new office space will need to be rented with associated movingexpenses. This upfront renovation expense is forecast to average $25,000 per regional officeand this will not be depreciated and will have no value at the end of year 10. Therefore, it is ayear 0 expense on the income statement and not an investment.The added regional annual office expense for each regional location for maintenance,heating, and cooling is estimated at a constant $12,000 annually starting in year 1.Each regional office will need to hire a service technician that is estimated at $84,000annually each (for all 10 years) starting in year 1. This is an annual expense since it is notdependent on sales volume.TRAINING UPFRONTUpfront design, sales and repair training will be extensive. Training programs will haveto be designed, training facilities rented, and training sessions held. The total of these isestimated at $350,000 in year 0.YEAR 0 EXPENSESNote that there are year 0 (up front) expenses for inventory, training, central warehouseexpense, and regional office renovations that are not depreciable, nor do these expenses havea salvage value. Simply list them in the income and cash flow statement where applicable aswould be done if they were in years 1-10. These will be in addition to the year 0 centralwarehouse investments.REVENUE AND COSTSThe annual sales quantities of the robotic milking systems is expected to be 10 systemsin year 1, 20 in year 2, 305 in year 3, and 40 in years 4 through 10. Each system will be sold atan average price of $290,000. This includes a 10 year warranty for parts and labor. Cost of theproduct purchased from the foreign manufacturer that includes shipping will be 60% of therevenue. Additional costs to assemble, ship and install each order at customer farms isestimated at 7.5% of revenue.WORKING CAPITALThe foreign manufacturer offers payment terms of Net 60 meaning that CMC has 60days to pay and therefore accounts payable will be two months of purchase cost (2/12% percentof purchases). The accounts payable will start in year 0 as inventory is purchased in year 0.CMC customers will be granted payment terms of 2/10 net 30 meaning they have 30days to pay with a 2% discount if paid in 10 days. For this proposal, accounts receivable can beconsidered as one month of sales (1/12% of sales revenue) starting in year 1.Inventory is discussed above in the Central Warehouse section.Assume all working capital to be zero at the end of year 10 since it could feasibly beliquidated if operations were ceased then.ANDREWS CHARGEAndrew has been charged to do the following:1.Provide a ten year present worth financial analysis to determine if this proposal isfinancially advisable. He is to use a minimally acceptable rate of return of 10%,income tax rate of 20%, and a capital gains tax rate of 15%.2. Summarize the financial resources that will be needed to fund this (how they will beobtained is not to be addressed)..3. Cite potential risks and what potential financial effects could these have?4. Summarize any non-financial considerations that need to be considered whenmaking an accept-reject decision.REFERENCESGrobart, S. "The $210,000 Cow-Milking Robot", Bloombery Business Week, October 12,2012., J. "With Farm Robotics, the Cows Decide When It's Milking Time", New YorkTimes, April 22, 2014, L., Producers share insight on milking cows with robots", Hoard's Dairyman,September 2, 2014., D., "Lely Astronaut A4 milking robot lets cows milk themselves", gizmag,Deptember 2, 2013, S. "Roboting Milking", American Dairymen,September.


Paper#39429 | Written in 18-Jul-2015

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