Carded Graphics, Llc Sheeter Replacement Decision (Solution)
UVA-F-1606TN
Rev. Sept. 1, 2011
CARDED GRAPHICS, LLC: SHEETER REPLACEMENT DECISION Teaching Note
Synopsis and Objectives The owner of a midsize folding carton printer is considering the replacement of an old machine for cutting sheets of paper from rolls (a sheeter) with a new one. This standard capital budgeting analysis, which requires identification of both the relevant cash flows and the relevant discount rate, is enhanced by an alternative that is not explicitly stated but can be readily identified and analyzed—to outsource all sheeting and close down the sheeting operation. This alternative, which turns out to be financially optimal based on quantifiable case facts, forces students to consider strategic and other nonquantifiable factors. In this context, students come to realize that success depends more on technology, innovation, and flexibility than is often assumed for manufacturing companies. The case is designed to achieve the following learning objectives: Provide a context for exploring the cash flow implications of an equipment replacement decision, including sunk costs, incremental costs, opportunity costs, capacity, and salvage values. Provide a context for exploring the determinants and calculation of an appropriate discount rate, including the evaluation and calculation of a weighted average cost of capital for industry peers, a company-specific cost of capital, and cost of borrowing specifically tied to the equipment purchase. Illustrate the limits to standard capital budgeting approaches and the importance of nonquantifiable factors such as flexibility and control. Expose students to sensitivity analysis and assessing the operational riskiness of decisions.
The calculation of the cash flows is moderately complex. The richness of the case is a function of the carefully articulated context for the decision. Managers are very clear about the strategic
This teaching note was prepared by Marc Lipson, Associate Professor of
Rev. Sept. 1, 2011
CARDED GRAPHICS, LLC: SHEETER REPLACEMENT DECISION Teaching Note
Synopsis and Objectives The owner of a midsize folding carton printer is considering the replacement of an old machine for cutting sheets of paper from rolls (a sheeter) with a new one. This standard capital budgeting analysis, which requires identification of both the relevant cash flows and the relevant discount rate, is enhanced by an alternative that is not explicitly stated but can be readily identified and analyzed—to outsource all sheeting and close down the sheeting operation. This alternative, which turns out to be financially optimal based on quantifiable case facts, forces students to consider strategic and other nonquantifiable factors. In this context, students come to realize that success depends more on technology, innovation, and flexibility than is often assumed for manufacturing companies. The case is designed to achieve the following learning objectives: Provide a context for exploring the cash flow implications of an equipment replacement decision, including sunk costs, incremental costs, opportunity costs, capacity, and salvage values. Provide a context for exploring the determinants and calculation of an appropriate discount rate, including the evaluation and calculation of a weighted average cost of capital for industry peers, a company-specific cost of capital, and cost of borrowing specifically tied to the equipment purchase. Illustrate the limits to standard capital budgeting approaches and the importance of nonquantifiable factors such as flexibility and control. Expose students to sensitivity analysis and assessing the operational riskiness of decisions.
The calculation of the cash flows is moderately complex. The richness of the case is a function of the carefully articulated context for the decision. Managers are very clear about the strategic
This teaching note was prepared by Marc Lipson, Associate Professor of