Composite Technologies Case

Executive Summary

Composite Technology Corporation explored two processes (Continuous Filament and Woven Mat) in order to find the lowest bid price to manufacture Navy landing crafts. We made the assumption that a marginally acceptable project would yield the lowest bid price for either method. Therefore, we set NPV=0 and IRR=r which allowed us to set the sum of the PVNCF=NINV. From there we broke down the equation to come up with a bid price for each method, below are our results.

CF Method WM Method

Bid Price per unit $224,610 $223,360

Although, the Woven Mat method presents the lowest bid price, there are challenges associated with it:

Cash deficiencies in year 3 (cash outflow)

Sensitive to inflation

An increase to the cost of capital requires an upward adjustment in bid price

Capital rationing may cause an upward adjustment to the bid price

Extension of contract causes additional risk to the project

Technological Advances would require re-assessment

As a result, if the method to be chosen is solely based on the lowest bid price then the WM method should be used. If other conditions/restrictions arise the CF method may be preferred and we would need to re-assess the situation.

Composite Technology Corporation explored two processes (Continuous Filament and Woven Mat) in order to find the lowest bid price to manufacture Navy landing crafts. These two methods differ in a few areas, one being they have different costs per unit in raw materials and labor. Their machinery costs also differ in that the CF method requires an initial investment of $4,500 (in thousands) while the WM method requires an initial investment of $2,645.10 and an additional investment in three years of $2,890.05. When accounted for these factors will ultimately lead to one method providing a lower cost per unit to the government. It is our job to complete and analyze their income statements in order to come to a bid price for both methods.

The production process that we would recommend to Carlisle and Borger would be the Woven Mat Method (WM) over the Continuous Filament (CF) Method. This decision comes off the basis that the WM method has a lower per unit bid price of $223,360, compared to a per unit bid price of $224,610 for the CF method. In order to arrive at these prices we first assumed that a marginally acceptable project would allow us to offer the lowest bid price. Therefore, we set NPV=0 and IRR=r which allowed us to set the sum of the PVNCF=NINV. Please see below for explanation in solving for bid price.

Solving for Bid Price:

Set NPV=0, IRR=r

So

∑_1^5▒〖PVNCF〗_t =NINV

∑_1^5▒〖NCF=∑_1^5▒〖〖OCF〗_t-〖Investment〗_t 〗〗+〖ATSV〗_t

〖OCF〗_t=R_t (1-t)-O_t (1-t)+D_t (t)

R_t=P_1 (Q)〖(1+g_p)〗^(1-t)

Substitute In:

∑_1^5▒〖NCF〗_t =∑_1^5▒P_1 (Q) (1+g_p )^(1-t) (1-t)-O_t (1-t)+D_t (t)-〖Inv〗_t+〖ATSV〗_t

∑_1^5▒〖PVNCF〗_t =∑_1^5▒P_1 (Q)(1+g_p )^(1-t) (1-t) 〖(1+r)〗^(-t)-O_t (1-t) 〖(1+r)〗^(-t)+D_t (t) 〖(1+r)〗^(-t)-〖Inv〗_t 〖(1+r)〗^(-t)+〖ATSV〗_t 〖(1+r)〗^(-t)

∑_1^5▒〖PVNCF〗_t =NINV

Substitute equation in for PVNCF

∑_1^5▒P_1 (Q) (1+g_p )^(1-t) (1-t) (1+r)^(-t)-O_t (1-t) (1+r)^(-t)+D_t (t) (1+r)^(-t)-〖Inv〗_t (1+r)^(-t)+〖ATSV〗_t (1+r)^(-t)=NINV

∑_1^5▒P_1 (Q) (1+g_p )^(1-t) (1-t) (1+r)^(-t)

=NINV+O_t (1-t) (1+r)^(-t)-D_t (t) (1+r)^(-t)+〖Inv〗_t

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