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New Denmark Sawmill Upgrade

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xianxin huang

on 22 February 2014

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Transcript of New Denmark Sawmill Upgrade

New Denmark Sawmill Upgrade
The proposals
Quantitative Analysis
Qualitative Consideration
Introduction
Background
Current situation
Problem statement
Jackson Limited:
1. A privately held company

2. Contained three major divisions

New Denmark:
1. A component of the SPF division

2. Produced the most lumber in each year of entire SPF sawmills

3. Used byproducts:
internal operation
sold to outsider customers


Background
Current situation
In December of 2003
Maurice Savoie was concerned that:
The unit cost of New Denmark was increasing
New Denmark site was less competitive

Savoie needed to make a decision:
Upgrade the present machinery with equipment
Reduce operating costs

Problem Statement
The New Denmark Sawmill was facing operational
difficulties.
The vice president of the Jackson Limited Company
should make a decision whether to upgrade the
equipment to maintain competition or change
nothing.

The first proposal: upgrade of a section of the “random length line” and add addition of a dry kiln.

The second proposal: similar with the first one with the addition of Hew Saw machine to replace the primary cut machine on one of the stud lines

The third proposal: similar with the second one with addition Hew Saw machine to other stud line.

Assumptions
Tax rate 40% CCA 20% salvage value 15%
Inflation rate 0
Incremental cost: net raw materials, direct labor cost, fuel and lubricants cost and shutdown cost.
continuing pool
Four criteria
NPV : Cost of capital=Pre-tax hurdle rate*(1-Tax rate)

IRR: NPV=0

ROI: =Incremental NPV÷(Initial outlay + shutdown cost)

Payback

Comparing Results of Each Proposal

Sensitivity Analysis
Assumed sales would increase 5% due to new machine

Scenario Analysis
Scenario Analysis
Market price went down during the periods.
The volatility of the exchange rate
The capital funds of the firm were scarce
The shutdown problems
The inflation problem
If no upgrade
Cost increasing
Competitor forces
Cost of maintain
Value drivers
Cost control

- Highest producing capacity
- Improving recovery rate

To achieve a better cost control

Proposal 2 or 3:
- Further improve recovery rate
- Reduce the payment of wages

Risk & Mitigation

-S(CAD/USD)↓, →USD depreciation, →New Denmark loss money
-S(CAD/USD)↑, →USD appreciation, →New Denmark gain more money


-market price increase, selling price increase,willing to sell more products
-market price decrease, selling price decrease,→do not need more products for sell

Exchange rate: High volatility

Market price: Uncertainly
Mitigation
Options
-USD depreciation, New Denmark buys the call option
- New Denmark expects USD appreciation

Forward contract

- making contract with buyer

Conclusion
Quantitative Analysis
Qualitative analysis
Risk analysis
Upgrade
&
Proposal #2
Thank you!
Questions & Comments
Xianxin Huang Fei Zheng
Shiyou Wang Siyu Zhou
Shi Chen Jingjing Xie
Full transcript