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If the Coat Fits, Wear It

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Submitted By plnergny
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|CASE: “If the Coat Fits, Wear It” |

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EXECUTIVE SUMMARY

Andy Pratt, the founder of The Innovative Sporting Goods Company, had developed a sound technique of making baseball bats and thus the company had gained a national reputation. Yet, a new machine had been developed in the industry and it makes baseball bats more durable and powerful. The ISG Company is trying to decide whether to replace the old machines with the new ones or not.

Up to now the head of the design group had tested the new product and researched the relevant cost and production process issues that a machine replacement would entail.

According to the numbers that is provided to us, Finance Department, we calculated the incremental cash flows and found the NPV as positive which implies that ISGC should accept the replacement.

The reason why we had to calculate the cash flows is that according to the Stand-Alone Principle it is crucial to calculate the incremental cash flows in the decision process. By calculating the cash flows we can reach to the NPV(Net Present Value) of the Project which refers to the difference between an investment’s market value and its cost. Basically, NPV can tell us what we can and cannot gain from an investment.

While calculating the cash flows, we first calculated the changes in revenues which is the difference between revenues from new and old machine. After that we calculated the change in costs with the information provided to us. We also calculated the Depreciation in order to reach the EBIT values. Finally we calculated the incremental cash flows according

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