Blue ridge Mill was considering a new addition to the on-site Longwood wood-yard. There would be 2 primary benefits first will be to eliminate the need to purchase short-wood from an outside supplier and second to create an new business opportunity to sell short wood on the open market. So the new wood yard would reduce the operating cost and increase the revenues. The new wood-yard will possess new technology to which will allow them to produce tree-length logs called long-wood on-site and they would be able to compete with the Shenandoah Mill in the short-wood market. Bob the controller at the Blue ridge mill needed to know if the 18million investment in expanding the company was worth it. In order to see if it was worth, first we put together the relevant cash-flows.
And it starts with 16million in Capital in 2007 …….
The Dilemma: Bob Prescott want to know if an investment of 18million (BIG ONES) on an on-site long wood wood-yard and new equipment would be worth the risk.
Prescott realizes that there are some benefits in adding in the wood-yard. First they would no longer need to purchase short wood from their competitor The Shenandoah Mill. The next benefit was creating a new opportunity to sell short wood on the open market and be able to level the competition between The Shenandoah Mill. These benefits will help to lower the operating cost and raise revenues for the Blue Ridge Mill.
If he decides to go through with the expansion the construction would start within a few months and would have to pay the 18million in two years the first year 2007 he would have to drop 16million and the other 2million in 2008. The expansion would create an estimated savings on operations of 2million in 2008 and 3.5 million in the rest on the years. With the opportunity to sell short wood on the open market Prescott estimated revenues of 4million in 2008 and increase to 10million till 2013. He estimated that the COGS would be 75% of sales revenue and the SG&A expense...