Rowe Pottery Works, Inc

Topics: Investment, Net present value, Internal rate of return Pages: 2 (315 words) Published: October 10, 2012
Rowe Pottery Works, Inc. “CASE STUDY”

1)Evaluate the purchase of a new kiln. Use the correct format.

Capital Budgeting

YearTotal InflowsPurchase New MachineSalesCOGSSelling ExpenseCash FlowsDis. C.FIRR Inflow 15%
0750175152152
1500225100210189159
2600270120245161161
3700315140280160160
4800360160315157157
5900405180350151151
61,000450200350131131
71,000450200-75011011071

Discounted payback period = 4 + 118/158= 4.74 years
The new project will take 4.74 years to recover the initial cash

Should the company purchase a new kiln? - ½ page explanation.

Yes, Row Pottery Works, Inc. should purchase the new Kiln because it would help them in the future. Rowe Pottery Works, Inc. has experienced losses for two and a half years. RPW’s operations are the main source of its losses as stated in the case. Continued losses were still present even thou attempts were made to control costs. The company was also in the process of investing in a new Kiln that had hopes of improving the company. Before that decision was made, I had to calculate numbers in order to witness whether or not purchasing the Kiln would be a good idea. The liquidity of inventories is very important in terms of profitability. I would recommend RPW to invest in the new Kiln because in the long run, it would be beneficial to the company. Future strategies for cost controlling and capital budgeting and management is going to be critical for RPW’s operation considering its insufficient debt capacity. Even though the sales of the company remain strong, the fixed costs are too high. Attempts to reduce the fix costs should be the key to increase company profitability.
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