ADAMAC INC

Role: Ryan Oliver, shareholder employee of ADAMAC

-

1/3 ownership; decision made with Ben Watts

Decision:
1. Expand ADAMAC by purchasing new machinery
o

Buy laser cutter, buy laser cutter and water jet or neither

2. Should Oliver and Watts buy out Degena?

Goals/Objectives:
o

Focus on excellent customer service and high quality

Avoid turning away customers

Avoid outsourcing

Increase capacity

Minimize overtime hours

Business Size-Up
Pros
-

Company is thriving due to focus

on high quality and customer
service
Diverse client base
o

Reduce seasonality and

risk

No client is more than 10%

of sales

Plenty of experience (Parks)

Cons
-

Limited capacity
o

Dont service large quantity orders

High reliance on equipment

o

Maintenance important to operations

Possible buy out?

Time
o

Expansion Machinery Purchase

Therefore we may have to turn away

customers

How much more can the owners handle if

they are working ridiculous hours atm

Pros

Cons

Having second machine provides back-up

in case of another break-down

Need to change locations therefore

increase costs

Increase capacity and allow for continued

growth

Requires bank financing (increase risk)

More hours?

New machinery may improve quality

o
-

Hiring and training new employees

Takes time to reach capacity

o

Risk of industry decline

Differential Analysis Laser Cutter

Assumptions

40%
Capacity

55%
Capacity

Cash Inflows:
Cost Savings
Incremental Sales

(1,613,750 * 55%) *40% or 55%

Total Cash Inflows

$ 6000

$ 6000

355,025

488,159

$361,025

$494,159

Cash Outflows:
Labour

(24 hrs * 40 hrs/week * 50w/yr) +

50,000

$98,000

$98,000

Rent

(1 per ft * 100,000sq/ft * 12 months) =

120,000

82,286

82,286

62,129

85, 428

48,938

66,878

Total Cash
Outflows

$ 291,053

$ 332,592

Net Cash Flows

$ 69,972

$ 161,567

Laser Cutter

$500,000

$500,000

Moving Costs

50,000

50,000

A/R

72,583

49,801

A/P

(8,525)

(11,723)

Old rent = 37,714

120,000 =37,714

COGS

282677/1613750 = 17.5%
(17.5% * Inc. Sales)

Operating XPS

42,079 * 12/months = 504,948

504,948 256,099 27,847 = 221,002
221,002/1613,750 = 13.7%
13.7% * Inc. Sales

Investments:

Inventory

7,197

9,895

Total Investments

621,255

647,973

ROH

Net cash flow/investments

11.3%

24.9%

Payback

Investment/net cash flow

8.9 years

4.0 years

We want to generate at least 8% to payback the bank loan, useful life of machine is 10 years,
we would have the initial investment back after either 9 or 4 years, want to make sure its paid
back before the equipment is obsolete
Potential Cost savings and recovered profits
Laser Cutter

Water Jet

Cost to outsource per day

$750

$625

Plus transportation cost of material

250

250

Total cost per day of outsourcing

1000

875

x6

X5

6000

4,375

Days lost due to breakdowns

Cost savings per year type of machinery
6000 +4375 = 10375

ADMAC INC WORKING CAPITAL CALCULATIONS

Accounts Receivables
Age of A/R = A/R/ Average daily sales
= 330,113/ (1613,750/365 days) = 736 days
Differential A/R = Diff. Sales/365 days * Age of A/R
= 355,025/365 * 736 days = 72, 583
Accounts Payable
Age of A/P = A/P/average daily COGS = 38,814/(282,677/365) = 49.4 days
Differential A/P = Diff. COGS/360 * 49.4
= 62,129/360 * 49.4 = $8,525
Inventory
Age of Inventory: Inventory E/B / Average daily COGS = 32,766/(282,677/365) = 41.7
Differential Inventory: Diff. COGS/365 * Age of Inventory = 62,129/360 * 41.7 = 7,197
Differential Analysis Laser Cutter and Water Jet

Cash Inflows:
Laser Cutter Sales
Water Jet Sales

355,025
40% of sales from last year

258,200

Cost Savings

10,375

Total Cash Inflows

623,600

Cash Outflows:
Labour

98,000

Rent

82,289

Operating XPS

13.7% * 612,225

84,012

COGS

17.5% 613,225

107,314

Total Cash Outflows

371,612

Net Cash Flows

251,988

Investments
Laser Cutter

500,000

Water Jet

200,000

Moving Costs

50,000

A/R

(613,225/360) * 73.6 days

125,370

A/P

17314/360 * 49.4 days

(14,726)

Inventory

12,451

Total Investment

873,075

ROI

28.9%

Payback

3.5 years

Decision:

Buying bother is the superior option

Constraints:
- They might have to hire other people as well
- They dont know how the industry will shape up after 10 years