Finance Case - Simpson and Selph

Simpson and Selph, Ltd.

Prepared for:

Prof. Marie Therese Agustin

Prepared by

Group 3

Executive Summary

Brian Douglas, a corporate financial analyst for Simpson and Selph, Ltd., a small carpet manufacturing company, was given the responsibility to evaluate the replacement of a carpet-binding machine. At the moment, he is considering three possible alternatives for the situation. He could:

1. Retain the original machine;

2. Replace the current machine with the same brand, a Harley;

3. Replace the current machine with a different brand, a Davidson.

With the given alternatives, he has to choose the best one that would enable the company to reduce cost and maximize investment, ultimately maximizing company profits.

Using different techniques to be able to identify which alternative would be the most appropriate and would give the highest benefit, Brian Douglas recommends the purchase of Davidson.

Analysis of Framework

To be able to identify which step to choose from the possible alternatives, we have to examine the financial impact each of them will bring about to the firm. Each option will necessitate different amounts of investments and is expected to generate variations in subsequent cash inflows. Hence, there is a need for us to explore various methods of assessing these cash flows for us to come up with a decision which will help maximize the partnership’s profits while maintaining its target capital structure. Thus, we will use assorted capital budgeting techniques in evaluating our choices to help us factor in time value, risk and return, and valuation considerations in our decision making.

Before we can jump into our assessment proper, we have to first look into the relevant cash flows that are expected to be produced by each of our alternative.

* First, there is an initial investment or cash outflow needed to kick off the replacement project. This will be composed of the cost of the new machine along with the...