16oz Bottle Inc Case Summary

16oz Bottle Expansion The possibility of expanding production to include a 16oz bottles in BBI’s current 32oz bottle production is great news. However, it is a decision that requires significant analysis as it will impact BBI well into the future. This memo will provide a detailed review of the decision process along with a discussion of several scenarios to help with making the decision to enter the 16oz bottling market. As a supplement to the memo, attached is an excel spreadsheet that provides the details.
Cost & Income Estimations Once the assessment was made to explore 16oz bottle production, the costs associated with the investment need to be evaluated. First, the projected cost of the machine is $300,000 which includes $40,000 of modification. The estimated life of the machine is seven years with a salvage value of $30,500. The cash outlay for the machine the first year will be $305,000 then depreciation of $32,786 for seven years ending with an after-tax salvage value of $18,300. Next, earnings are estimated to be $60,000 per year before interest, depreciation, and taxes (EBITDA). As indicated previously, depreciation is estimated to be $32,786 per year and the tax rate is 40% so the net income per year is projected to be $16,329 for the life of the machine. Finally, adding the cost estimates along …show more content…
The COE represents the compensation the market requires in exchange for holding the asset and accepting the risk of ownership. The COD on the other hand, symbolizes the rate the company pays on current debt (Ross, Westerfield, Jaffe, & Jordan, 2014). BBI’s cost of equity (COE) is 8.5% and cost of debt (COD) is 4.65% (see Tables 4 and 5). Using the COE and COD, an acceptable discount rate of 5.11% was calculated (see Table