Sparklin Automotive Company: Financial Analysis

Sparklin Automotive Company: Financial Analysis

Analysis of Calculations

This paper aims at helping management with the decision of whether Sparklin Automotive Company should purchase new equipment. This new equipment Sparklin Automotive is considering is a new machine that will help Sparklin Automotive Company to be able to manufacture 100,000 additional spark plugs each year over Sparklin Automotive Company's current production as of right now. This new equipment Sparklin Automotive Company is considering to purchase has a useful life of 5 years and has no salvage value. Sparklin Automotive Company will depreciate the equipment by using the straight line method. The straight line depreciation method is the easiest and most used depreciation method. Straight line depreciation method is calculated by taking the cost of the equipment when purchased or obtained, then subtracted by the salvage value of that equipment, then divided by the total productive years figured to have life for the company use of that equipment. The formula will be shown and used later in this paper (Kennon, 2009). Sparklin Automotive Company's specialty spark plugs are selling currently at an average price of $20.00 and are expected to cost Sparklin Automotive Company $8.00 to manufacture with this new equipment Sparklin Automotive Company is considering to purchase.

The "indirect cost" Sparklin Automotive Company is currently spending is expected to stay the same with the new equipment that is being considered for purchase by Sparklin Automotive Company. Sparklin Automotive Company is expected to spend "$3,000,000" on this new equipment as well as have it installed that will help Sparklin Automotive Company manufacture the specialty spark plugs. Sparklin Automotive Company is expected to have a "34% tax rate" as well after this purchase of the new equipment that Sparklin Automotive Company is considering to purchase. After management from Sparklin Automotive Company has given me the "capital structure" that I will use to show the calculations on, they also intend on keeping the company capital structure intact in financing the new equipment. I have been asked to use the correct analytical tools to determine if Sparklin Automotive Company should purchase the new equipment that will help increase the production of the specialty spark plugs. I will explain the spreadsheet with my recommendation at the very end of this paper as well as attach my spreadsheet for Sparklin Automotive Company management to be able to make an informed decision on if they should purchase the new equipment that is believed to increase spark plug production by "100,000 spark plugs per year" or to pass on purchasing the new equipment (CTUO, 2009).

I will be explaining the information needed to analyze the information for the company to make an informed decision on if Sparklin Automotive Company should purchase the new equipment that will increase spark plug manufacturing production by "100,000 spark plugs". I will be discussing the following: Weighted Average Cost of Capital (WACC) as well as explain the purpose of the Weighted Average Cost of Capital (WACC), and I will show the formula of the ...