Group 3

FIN 4596
Sec: 004
10/19/2014
Ryan Teichmann
Robert Horan
James Mason
Paul Graber
Executive Summary
Will replacing the Sheeter have a positive effect on Carded Graphics in the Long-run?
Murry Pitts is the proud owner of Carded Graphics, LLC. Carded Graphics business lies
in a niche market known as the Folding Carton Industry which is part of the much larger paper
industry. Niche markets in the paper industry tend to be highly concentrated and companies need
a strong competitive edge to outperform their competitors. In Pitts industry specifically the
speed and quality at which he can produce his product is key. Replacing the old sheeter with the
new one has many benefits including: Increased capacity, reducing product waste, as well as
improving the efficiency in operation and the quality of the product. Pitts main criteria for the
investment are that it will have a positive effect on his operations in the long-term and is
prepared for a negative impact to annual cash flow, so long as they are reasonable. Pitts is
already set on the idea of replacing the sheeter but it curious what the NPV and sensitivity
analysis will say about the investment.
In order to find the NPV of Carded Graphics if it were to buy the new sheeter versus if
we were to not buy the sheeter, we had to first determine the discount rate. To do this we made
several assumptions. First is that the tax rate is equal through the industry due to the competitive
market, and that we used the tax rate from 2007 (33%) because there is an unexpected loss in
2008 which also had an unexpected effect in 2009. The tax rate in 2009 is 18%, which does not
make sense if we use that rate, for a large business. Carded Graphics is also a part of the
packaging industry and we used other competitors of the packaging industry as comparables.

Group 3
FIN 4596
Sec: 004
10/19/2014
The risk free rate is the 10 year Government Bond (3.85%) because it is the closest matching
time frame of our project, and the market risk premium is 6%. To calculate the WACC we first
calculated the average beta of the industry because no company has similar assets to Carded
Graphics, and also the average debt and average equity of all the companies in the industry.
Exhibit 5 shows how we used all of our assumptions and calculated the WACC.
Pitts has two options: One he can refurbish the old sheeter, extending its useful life
another 9 years; or two replace the old sheeter with a new one that will have a useful life of 9
years. An NPV analysis of refurbishing the old machine using the WACC we calculated in the
previous paragraph resulted in a value of $2,890,426.26 (Exhibit 1). The NPV analysis of
replacing the old sheeter resulted in the value of $3,420,086 (Exhibit 2).
After analyzing both projects, the best decision for Pitts is to replace the old sheeter
because it produces a higher NPV. This investment will increase efficiency and have a positive
effect on operations in the long-term. Carded Graphics new sheeter will give them a competitive
edge in producing products and help them compete in the paper industry. Taking into account the
sensitivity of WACC and the increased use of roll paper (important inputs), we find that even
with a number of different factors, this policy is still favorable (Exhibits 3 and 4).
Overall, we are pleased to announce the numbers back up Pitts inhibition, and that he
should pursue the new sheeter, based on the benefits of expanded capacity and cost reduction.
This is shown by the NPV calculations and the sensitivity analyses.

Exhibits

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FIN 4596
Sec: 004
10/19/2014

Group 3
FIN 4596
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10/19/2014

Exhibit 1 (Refurbishing old

Sheeter)

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FIN 4596
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10/19/2014

Exhibit 2 (Purchasing New

Sheeter)

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FIN 4596
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10/19/2014
Exhibit 3

Exhibit 4

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Exhibit 5

1. Solve for the beta asset

1.24/(1+(1-.33)*.7)
2. Solve for the project beta
.84*(1+(1-.33)*1.8)
3. Use CAPM to find Re.
3.85+(.06*1.86)
4. Find cost of debt by interest expense/outstanding debt
Outstanding debt = line of credit + total long term debt

Group 3
FIN 4596
Sec: 004
10/19/2014