Paraphrase

Polymold Division is one of the largest manufacturers of precision injection molds and they are experiencing a rapid decline in their business. They are trying to decide whether investing in a CAD/CAM equipment will prove beneficial in the long run. Mr. Martin, the manager of Polymold Division, is worried that sales would continue to steadily decline without the acquisition of the CAD/CAM equipment. Since there are many competitors, their market share will continue shrink with their current products. The CAD/CAM acquisition will help reduce costs and the development of new products, but only after all necessary expenses to get the process up and running.

As stated in the case, we can assume that market share will drop from 5.1% in 1983 to 4.2% in 1988 without the acquisition of CAD/CAM. There will be a 4% point increase in cost of goods sold. With the acquisition of CAD/CAM, market share will increase from 5.1% in 1983 to 7.3% in 1988. However, there is a probability that market share could be as little as 6.3% or as high as 7.7%. We will also be using a 50% tax rate as stated in the case.

In order to solve this case, we must forecast future financial statements with and without the acquisition of CAD/CAM. The financial statements will be heavily influenced by sales and growth. We can create forecasted income statements for each year to analyze Polymold’s budget. We would calculate pretax earnings by taking forecasted earnings and subtracting cost of goods sold and various expenses (administrative expenses, depreciation, etc.). We would then subtract the 50% tax rate given in the case to calculate our net income. This same procedure would be used for both scenarios of with or without the purchase of CAD/CAM. However, with the purchase of CAD/CAM, we would also have to take into account all the expenses that would come with the acquisition of this new tool. As Mr. Martin had said, research and development costs would double in the beginning, and depreciation of the new machine has to be taken into account as well. This would have to be included in addition to all current expenses. New effort, selling, general, and administrative expenses were expected to decline relative to sales. As we forecast the later years, we have to take into account these cost savings.

In comparing the two scenarios, we can see that accounts receivable and volume will increase as demand increases. The CAD/CAM is expected to boost Polymold’s sales drastically. The acquisition of the CAD/CAM tool will also increase Polymold’s market share and production thus becoming more competitive against their rivals.

Mr. Martin also planned to calculate the division’s cost of capital by basing his estimate of the company’s systematic risk. We would calculate this by using the capital asset pricing model. In this case, we are required to find the beta, or riskiness of the company. Calculating the cost of capital for both scenarios will give us accurate calculations that will help make our decision.