Wriston Manufacturing Case Writeup Essay
Redistribution vs. Factory Termination vs. New Plant
Recommendation: The Detroit plant is an inefficient factory and ought to be closed as soon as possible. Products should be transferred to other plants for benefits in both operational and financial gain.
Assessment of Option 1: Close the Plant (Transfer Products to Other Plants)
Selling the plant would cause immediate cash inflow of $4,000,000 and $6,000,000 loss from employee termination. While this does net in a $2,000,000 loss, this option results in the highest net present value for Wriston Manufacturing. In this option the Detroit products are segmented into …show more content…
Assessment of Option 2: Build a New “Detroit” Plant Financial Analysis:
This option results in a $36 million outflow for initial plant construction and startup costs (plant construction: $30 million + $6 million), as well as a $4 million inflow from the sale of the old plant. It yields a NPV of $-5.38 million from $3 million annual cash inflows. The terminal value for year 20 when the factory will be sold is based on the terminal value of the Detroit factory because we assume that the factories are identical in structure. We calculate terminal value through multiplying $4,000,000 by 2 assuming that our factory will be sold in 20 years instead of 77 and that the highest amount of depreciation will occur in the first 50 years.