2. that can be used as
swimmingpool surrounds to make swimmingpools
look more like natural ponds, and realistic
predator birds
designed to keep “bully” birdssuch as starlings, pigeons
and English sparrows away.
Stoneville distributes its products through two
channels—a company owned website and in-store
placement within a multi-state garden and home
improvement retail chain, Builders Warehouse,
Inc. The
contractual relationship with Builders Warehouse
requires that Stoneville place pre-agreed popular
items on
consignment at each of the chain’s hyper stores
throughout Minnesota and North Dakota.
Although this greatly
increased the company’s inventory and funding
requirements, Jack continued to see the relationship
as key to
building awareness of the quality of his products.
Approximately 85% of Stoneville, Inc. sales come
from in-store placement with the remainder ordered
directly through the company website.
Conversation with the Founder and CEO
You have just begun the second weekof your
internship with Stoneville, Inc. when Mr Sprat
calls you into
his office.
3. Sprat: Good morning! As you are about to
start your second weekwith us, I thought it
would be a good idea for me
to find out how things are going. As I
indicated when I first offered you the
position for the summer, I want
to support your education by making sure that the
tasksyou fulfilwhile with us complement your
studies as
much as possible.
You: Good morning Mr Sprat. Thanks for taking
the time to chat with me. My first weekwas
fantastic and I have
really enjoyed seeing how the production
division works. Although we did spend time in
my sophomore
year learning about lean manufacturing, actually seeing
how you have implemented it has really
grounded
what was previously a little theoretical for me. I
have also greatly appreciated Ms Brews1 and
her team. My
parents had suggested that I may get a little
friendly teasing when I arrived—they even
warned me about
being sent off to collect left-handed
screwdrivers—but none of this happened. All of
the team were very
welcoming and open to answering my queries, no
matter how silly they might have been.
Sprat: I’m pleased to hear it. Does this mean
that you’d like to continue working with Jane
and the production
4. department?
1 Ms Jane Brews is the vice president for production at
Stoneville, Inc.
MJP_TP2_Rev.1.1 Project Appraisal at Stoneville, Inc.
Page 2 of 8
You: Now that you ask, although I’d be happy to
continue working with the production team, I
am hoping to
spent a little time in finance. As you are aware,
I have decided to major in Finance &
Accounting at the Offutt
School of Business at ConcordiaCollege. It would
be really helpful if I could spend a
little time learning more
about broader treasury aspects. I learned in
my foundation principles of accounting and
finance course that
treasury is involved in ensuring that Stoneville
maintains the needed liquidity, in developing
the company’s
financial plans, and in looking into the financial
rationale for its capital investment choices.
Seeing how
someof this is actually done would be fascinating
for me!
Sprat: Wow, your timing is perfect! We
have just had a request from Builders Warehouse
to manufacture and
5. supply rainwater capture barrels that resemble faux
rocks. Recent media stories about
possible drought
conditions in North Dakota2 are raising
concerns about increases to water tariffs in
urban areas. This has
resulted in a number of urban homeowners
requesting rainwater capture barrels that can be
attached to
domestic downpipes and used to store roof runoff.
The barrels currently available have a real
industrial
look to them and they certainly don’t make for an
attractive presence against the wall of a home.
Central
purchasing of Builders Warehouse, Inc. believe
that a storage devise of up to fifty gallons
that is designed to
look like a largeboulder would offer a popular
alternative.
Claire, a bookkeeper in the finance
department, has done an analysis for us using
information that she
obtained from our production group. Her analysis
suggests that the investment will boost our
earnings per
share only marginally and achieve an internal
rate of return that is less than our company’s
hurdle rate of
8% per annum. She suggests that we do not take on
the project. Both I and William Blake, our
vice president
of finance, greatly respect Claire’s bookkeeping
ability. Every year, our auditors comment on
how easy it is
6. for them to perform their due diligence thanks to
Claire’s abilities and processes.However, even she
would
not claim to be an expert in capital
budgeting. Perhaps you can look through what
has been done with fresh
college eyes? William and I are concerned that
not investing in the project may adversely impact
our
relationship with Builders Warehouse. Even though
the product will only represent an extremely small
percentage of their revenue, our sense is that
they see offering it as further evidence of
the company’s
commitment to sustainability or good citizenship.
You: Gee, Mr Sprat, I would love to give
this a go! We covered capital budgeting in
our introductory course with
the professor telling us about a whole host of
do’s and don’ts when undertaking a capital
budgeting
exercise.
Sprat: Terrific! I know that William would
appreciatesomeone taking a second look at
the value proposition
before we commit. I’ll give him a call and say
you’ll be along tomorrow morning to collect
any material he
has, as well as the analysis done by Claire. I’ll
also give Jane a call to ask her to release
you from the
production department from tomorrow to concentrate
7. on this assignment.
You: Thank you Mr Sprat. I really appreciate
this opportunity.
2 See: http://www.valleynewslive.com/content/news/Drought-
conditions-create-difficulties-for-ND-farmers-ranchers-
426368681.html and
http://www.westfargopioneer.com/news/4306292-hay-lottery-
planned-north-dakota-ranchers-struggling-drought, accessed
February 9, 2018 at 2:14PM
EST.
MJP_TP2_Rev.1.1 Project Appraisal at Stoneville, Inc.
Page 3 of 8
The Task at Hand
It is 10:00AM Tuesday morning and you are sitting
in a small office allocated to you by
William Blake. Lying
on the desk in front of you is the material given
to you by Mr Blake. Although the material is
less than you expected,
you do see somechallenges ahead. You hope you
are up to the assignment.
Mr Blake has asked you to review the
materials and make any adjustments you
consider appropriate before
reaching a conclusion on whether the investment
8. should be pursued. Although you gathered from
your discussion
with him that he was as keen as Mr Sprat that
Stoneville make the right decision on this
investment, you did get a
reinforcedsense of how respected Claire was. What
would the implications be if you come to
a recommendation that
is contrary to her? How might you handle this?
What about the relationship with Builders
Warehouse, Inc.?
You have been asked to submit a written
memorandum addressed to both Mr Sprat and
Mr Blake
motivating your case—particularly in areaswhere
you believe that an alternative choice should
be made concerning
aspect that is material to the decision—and to
include any necessary spreadsheets as appendices
to the document.
The material lyingon the desk in front of you
includes:
• Appendix 1: Email from Builders Warehouse
requesting faux rock rainwater capture barrels
• Appendix 2: Production department estimates of
requirements for production
• Appendix 3: Claire’s Analysis and conclusions
Memorandum Requirements
The memorandum that you need to submit must be
concise and focused on key issues. It should
9. be
submitted as a single .PDFdocument that includes
any necessary appendices. Remember that you
need to impress
Messrs Sprat and Blake with as parsimonious a
report as is possible while ensuring that
your argumentsare well
presented.The professionalism of presentation is
also important. In particular, you need to:
• Begin with an executive summary that presents your
overall recommendation and a brief motivation.
• Within the body of your report you need to
include:
o More comprehensive justifications for your choices
when developing your cash flow analysis. You
need to justify where, and why, your analysis does
not agree with choices made by Claire.
o The outcome of your sensitivity analyses and
discuss how they support your ultimate
recommendation. What if sales volumes are 5%
lower than expected, or production costsare
5%
higher? What will be the outcome if the
ultimate retail pricecould be increased by
5% at existing
volumes?
o An appendix that presents your comprehensive base-case
cash flow analysis—laying out the
incremental cash flows for each quarter—and the
final net present value etc.
10. MJP_TP2_Rev.1.1 Project Appraisal at Stoneville, Inc.
Page 4 of 8
Appendix 1:
Email from Builders Warehouse requesting faux
rock rainwater capture barrels
From: Olive Smith [[email protected]]
Sent: Friday, February 09, 2018 5:52 PM
To: Sprat, Jack
Subject: Proposal for Faux Rainwater Barrels
Dear Jack,
I refer to our telephone conversation of last week.
With the current drought concerns in Northern Dakota,
Builders Warehouse anticipates significant
demand from
homeowners for low costsself-installation rainwater
capture barrels. Preliminary market
research has been
undertaken by our marketing department using
both focus group techniques and in-store
surveys. The results
confirm for us that barrels disguised as large
boulders holding between twenty-five and fifty
11. gallons of rainwater
have particular appeal for urban home owners
who want to maintain their gardens if expected
water restrictions
are instituted in the Moorhead-Fargo metropolitan
area. Perhaps unsurprisingly given how many
roof runoff
drainpipes are front of property facing, concern
for appearance remains high amongst even the
most ardent
gardeners.
Given the good relationship we have with Stoneville,
Inc. and the quality and consequent demand
we face for your
products that we stock, the Board of Builders
Warehouse has charged me with asking if
you would be prepared
design and deliver to our stores faux rock barrels
that can be easily installed—placed—against
property walls to
allow a cut off drainpipe to flow directly into
them. We would be looking for two barrel
sizes, twenty-five and a fifty
gallons that we believe will retail at $125 and
$218.75 respectively. The terms of stocking
would be exactly the same
as with your otherproducts—on consignment with us
keeping 20% of the retail priceand remitting
the remainder
to you when you complete your quarterly restocking
and submit your invoice through to us. As is
standard with
consignment arrangements, we require quarterly
opening consignment inventory equal to 110%
of expected
12. quarterly sales except for the final quarter of the
contract.
Our expectation is that we’llsell 1,000 of the
twenty-five gallon and 750 of the fifty gallon
barrels per quarter over
the first year, increasingby 10% for the next year before
declining by 25% for the final year of sales and
then
ceasing when a major Minnesota dam project
is completedthat will be able to fully supply
the Morehead-Fargo
metropolis.
Please feel free to call if you have any additional
queries. We would like to sign a formal
contract as soon as possible.
Kind regards,
Olive
Olive Smith
Vice President, Purchasing
Builders Warehouse, Inc.
510 Center Ave, Moorhead, MN 56560
T: 218-299-1000 Ext. 1113
Email: [email protected]
MJP_TP2_Rev.1.1 Project Appraisal at Stoneville, Inc.
Page 5 of 8
Appendix 2:
Production department estimates of requirements
for production
13. Product Design:
Stoneville, Inc. subcontracted design team has
developed the production plans for the twenty-
five and fifty gallon
faux rock rainwater barrels. Their design meets
the company’s lean manufacturing requirements
with process flow
requiring no retention of raw materials. Rather, on
arrival, raw materials are fed directly into the
production
machinery to produce finished goods that can be
transported relatively quickly to the retail
client, Builders
Warehouse, Inc.
The recently submitted invoice from the designer team is
at the agreed fee of $35,000.
Production:
Production machinery needed to produce the
barrels will be acquired at an all-in priceof
$600,000. The machinery
will qualify for five-year modified accelerated cost
recovery system (MACRS-5) depreciation and, if
purchased, if will
be in service in the 1st quarter. Consequently,
the schedule for annual depreciation deductions
is:
Year 1 2 3 4 5 6
Allowance 35.0% 26.0% 15.6% 11.01%
11.01% 1.38%
14. Stoneville’s experience with machinery purchases
suggests that its second-hand equipment can
generally be
disposed of after threeor four years of use at
150% of its depreciated value. The
company has a reputation for
exemplary maintenance of it equipment and it
can usually obtain manufacturer endorsement
when looking to sell
equipment that it no longer requires.
If Stoneville accepts the offer to supply the barrels
to Builders Warehouse, Inc., the production
facilities will be
located in a building that the Company currently
leases to a 3rd partyat $24,000 per quarter
payable in advance.
Since the leaseis about to expire, Stoneville
can take back the building for its own use without
incurring any lessor
penalties for earlytermination of the lease.
Estimates of the production costsexcluding production
equipment depreciation (i.e. materials and labor)
are 55% of
the anticipated wholesale price. At today’s prices,
they are estimated at $55.00 and $96.25 for
the twenty-five and
fifty gallon barrels respectively. As with all raw
materials purchasing, thesecostspresume Stoneville
will pay cash
and receive the maximum supplier discounts possible.
Given the expected size and weight of the barrels,
shipping coststo the retail outlets of
15. Builders Warehouse are
estimated at 15% of the production costs, or
$8.25 and $14.44 per barrel for the two
respective sizes.
MJP_TP2_Rev.1.1 Project Appraisal at Stoneville, Inc.
Page 6 of 8
Appendix 3:
Claire’s Analysis and conclusions
Recommendation:
My overall recommendation is that we do not
invest in the project. I calculate the net
present value of the three-year
project at a negative $80,194 with a
corresponding internal rate of return (IRR) of
3.59% per annum, significantly
below our hurdle rate of 8% per annum.
Additionally, although earnings for the first year
are positive at $10,300
and we intend to finance the equipment
purchase and working capital needed using
debt and current cash balances,
this only represents a 2.94c improvement in
earnings per share given the 350,000 shares
currently outstanding.
This hardly seems worth the investment given
the negative value indicators of NPV and IRR.
16. Assumptions and Calculations:
As you will see from the attached spreadsheet, I
have undertaken a quarterly analysis over the
three-year life of the
project. Specific assumptions that I have made
are:
Quarterly Income Statements:
• I presume that the volumes sold are as anticipated
in the memorandum from Olive Smith of
1,000 and 750
units per quarter for the twenty-five and fifty gallon
barrels respectively. First year retail selling
prices of
$125 and $218.75 respectively have been translated into
$100 and $175 per barrel selling prices to
Stoneville, Inc.
• Selling prices are escalated at our corporate
assumed inflation rate of 1.5%per annum with
the assumption
that Builders Warehouse will adjust prices once
per annum. This is consistent with their past
practices.
• Cost of production—excluding depreciation of
the production equipment—and shipping costs
are set at
40% of the anticipated wholesale priceand 15% of
the expected production cost respectively.
• The depreciation allowance per annum is based
17. upon the required MACRS-5 schedule under
the
assumption the equipment is brought into service
in the 1st quarter. The annual allowance is
distributed
equally across the four quarters of each year.
• As is common practice when monitoring
divisional performance, I have allocated an
overhead charge of
7.5%of project revenue even though we do not
anticipate any incremental expenditure or
investment
needs in central administration.
• Because we need to recover our design investment,
I have charged the $35,000 to the project. I
presume
that the taxation benefit will be realised in the
first quarter even though we are already
obligated to pay the
invoice within the next few weeks.
• Finally, although we have enough cash on hand to
fund our needed working capital investments,
Stoneville,
Inc. will need to arrange a medium term loan to
fund the equipment purchase. Treasury has
indicated that
our banker is willing to extend the loan at an
annual rate of 4.4%with interest payable
quarterly in arrears.
Equipment and Working Capital Investments:
• As indicated above, the $600,000 capital investment
18. is depreciated using the MACRS-5
schedule.
• No allowance is made to sell or scrap the
equipment at the end of the project. This
seems prudent,
particularly if any assumption of residual value
on equipment makes a poor project look
attractive. Our skill
MJP_TP2_Rev.1.1 Project Appraisal at Stoneville, Inc.
Page 7 of 8
is in faux garden product production and not in
second-hand equipment sales. This suggests
we should find
value in our core operating business.
• From a working capital perspective, opening
inventories for each quarter—excluding the last—is
set equal
to 110% of the production cost of the
inventory that Builders Warehouse, Inc. expects to
sell over the
quarter. For the last quarter of planned sales,
the inventory is set at 100% of the
inventory that Builders
Warehouse, Inc. expects to sell over the quarter as
per our standard consignment agreements.
Accounts
receivableat the end of each quarter are set equal
to the expected revenue to Stoneville for the
quarter. Full
19. recovery of accounts receivableis expected at the
end of the three-year contract. Finally, all raw
materials
are purchased for cash so that we obtain maximum
discounts and accounts payable are zero throughout
the
life of the project
Sensitivity Analysis:
• Given the negative outlook for the project at
base assumptions, I have not undertaken a
major sensitivity
analysis. However, even if Builders Warehouse is
prepared to consider increasingthe initial retail
priceby
4.5%to $130.63 and $228.59 for the twenty-five
and fifty gallon barrels respectively, this will
only make the
project marginally worth pursuing.
Assuming that our production and distribution costs
remain the same, the incremental after tax
contributions to
Stoneville for the first year are:
25 gallon barrel: 80% ( $130.63 -
$125.00 ) ( 1 – 0.21 ) = $3.56
per barrel
50 gallon barrel: 80% ( $228.59 -
$218.75 ) ( 1 – 0.21 ) = $6.22
per barrel
This results in a final net present value of
$6,110 and an internal rate of return of
8.33%. The impact on our
20. first year earnings per share would be 12.34c.
MJP_TP2_Rev.1.1 Project Appraisal at Stoneville, Inc.
Page 8 of 8
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83. Selby Larson
To the naked eye art is restricted to certain areas in our daily
life, for instance a museum. Often perceived as a way of
expression, many assume depressed people stroke their pain
away onto a white canvas aisle and later present it in a
showcase hoping for, in return, what little acceptance exists.
Others view art as a work done manually by kindergarteners
with finger paint later to hang on the fridge in a boastful
manner. Not for Barbara Kruger though. In her eyes, art is
everywhere and expressed in the simplest form of
comprehension—words.
As a Newark, New Jersey, native, Barbara Kruger grew up not
even a half an hour from one of The United States’ most
thriving artistic communities, New York City. Born on January
26, 1945, it would be only a green twenty-one years before what
seemed to her as a keen career opportunity to blossom into a
prominent expertise (Rogallery.com 1). Attending Syracuse
University for only a year in 1964 and then transferring to
Parsons School of Design in New York for one semester, Kruger
needed little more to jumpstart her very fortunate life. While at
Parsons Design School, she worked with Diane Arbus and
graphic designer Marvin Israel, which led her to an altering
encounter (Rogallery.com 1).
In a biographical document composed on www.RoGallery.com
in 2008, an anonymous author reported, “In 1966, she took a job
with Condé Nast, working in the design department of
Mademoiselle” (Barbara Kruger 1). After only a year with the
magazine, Kruger held the title of head designer. Continuing on
the road of expression, “for the next ten years Kruger took up
graphic designing for magazines, book jackets, and even
freelance picture editing” (Rogallery.com). With her love of
84. design and photography also came her passion for poetry, but
her talents showed no signs of conclusion. After realizing
through her showings in the Whitney Biennial in 1973, Artists
Spaces, and Fischbach Gallery in New York, Kruger decided to
say “alvedersain” to art making and take on teaching
(Rogallery.com 1). She moved to Berkley where she taught for
four years. Her teachings have also taken place at the
California Institute of Art and The School of the Art Institute in
Chicago (Pbs.org 1). Not until 1977 did Kruger’s most famous
work begin. First, Kruger took her own black-and-white
photographs and later interjected over-laying slogans, but two
years later, she cut out the middleman and chose to use pre-
existing images (Pbs.org 1). Most of the chosen pictures
revolved around “mid-century American print-media sources,
with words collaged directly over them” (RoGallery.com 1).
From here, Kruger’s professionalism blasted and managed to
continue over-taking its viewers as an anonymous author quotes
Juliana Engberg deciphering in an undated documentary on
www.geocities.com posted by the Museum of American Art:
Barbara Kruger's on going project is to provoke questions about
power and its effect on the human condition: to investigate the
way power is constructed, used and abused. In her works, which
have become the demonstrative visual icons of the 1980s and
1990s, power is interrogated and interpreted through the social,
economic and political arrangements which motor the life
impulses of love, hate, sex and death. (Barbara Kruger 1)
Through Ms. Kruger’s recognizable black and white shades of
media with bursts of bold red phrases in her trademark futura
bold italic text, she focuses on her audience and capturing their
intellect. An anonymous author in an article titled, “Whitney
Museum of Art,” published in 2000, stated that, “Kruger's work
addresses the cultural representations of power, identity and
sexuality, and challenges the spectacles of stereotypes and
clichés” (tfaoi.com 2). By the looks of her most recent works
85. such as her exhibits at the Mary Boone Gallery, the above
aspects all apply leaving her spectators with philosophical
vantage points (tfaoi.com 1).
Barbara Kruger’s main medium through her art is words applied
with media. In her self-titled exhibit at the Mary Boone
Gallery, text jumped to new locations. Words appeared on the
floor, on the walls, and on the ceiling, almost trapping her
viewers. Her purpose was for her work to be viewed from every
angle, drawing different attention to certain messages
(arthistoryarchive.com 5). In an article on
arthistoryarchive.com entitled Barbara Kruger—Feminist Art
posted at an undated time by an anonymous author,
H.W./Anthony F Janson quotes his interpretation of the Mary
Boone Gallery Exhibit:
Kruger's works are direct and evoke an immediate response.
Usually her style involves the cropping of a magazine or
newspaper image enlarged in black and white. The enlargement
of the image is done as crudely as possible to monumental
proportions. A message is stenciled on the image, usually in
white letters against a background of red. The text and image
are unrelated in an effort to create anxiety by the audience that
plays on the fears of society. (The Art History Archive 6)
Kruger’s work is not only seen in museums and exhibitions all
around the world, she branches out to every audience. Her
provocative photos and sturdy notations have made visits
everywhere as Pbs’s Art in the Twenty-First Century biography
article published in 2007 documented, “Kruger’s work has
appeared on billboards, bus cards, posters, a public park, a train
station platform in Strasbourg, France, and in other public
commissions”(Pbs.org). In her piece regarding abortion, a
86. picture of President George W. Bush underlying text reads “Pro-
life for the unborn…Pro-death for the born” appeals strictly to
issues with an ethos pull. This topic has been on debate tables
for years and continues to touch people. Some may say that this
would draw matters to more of a pathos category, feeling that
abortion is spiteful and immoral. Although, this piece could
also hold a trace of logos, regarding the judgment and logic on
such an influential issue. In difference, Kruger’s work
ultimately reflects its meaning based on one’s opinions during
examination.
Leah Ollman reports on June 28, 2008, in a Los Angeles Times
article titled, “Barbara Kruger Goes Back to School,” quoting
Barbara Kruger on her self-evaluation, in which she holds a
firm motive:
The world is so different than when I was born, and yet there
are some things that do stay the same," she said. "I try to make
work about how we are to one another. It's a creation of a kind
of commentary. People through time have been struggling with
this. You can read a Russian novel from 150 years ago and some
of it feels so alive today. That's the power of this commentary
that sometimes we call art. (Ollman 3)
A much deeper spirituality peeks through as Kruger speaks of
her own work. She appoints current and lasting problems very
bluntly, but the purpose is prosperous. I feel as though she
simply wishes to better the world and truly make people
interrogate an inner opinion rather than one based on biases.
Kruger seems to ward off fear of rejection by splattering it
through media with fierce phrases and simple, but strong colors,
without a timid persona. Her work is quite influential and the
declarative messages prevail a very real take on art, which is
why many find it alluring.
87. Kruger holds a mentality in which drawing in her audience
relies much on first glances, hence the conspicuous color usage,
along with cunning connotations. This image holds ability to
captivate any girl, young or old, by its simple use of a popular
childhood favorite—Snow White. Shel Silverstein, a famous
poet, among many other occupations, reflects much of the image
Kruger attempted to reveal to the world in his poem titled, “Tell
Me.” Silverstein writes, “Tell me I’m clever / Tell me I’m kind
/ Tell me I’m talented” (1-3), resembling much of Kruger’s
implication of self-admiration conveyed through the picture.
The blonde, tall, glowing Caucasian women seems to silently
boast, possibly searching for reassurance, much like Silverstein
indicates in the following lines:
Tell me I’m cute,
Tell me I’m sensitive,
Graceful and wise,
Tell me I’m perfect— (4-7).
The character showcased in this solo picture hopes for just
those things. Perhaps Kruger attempted to note to the viewer
that this lady seems to have all of those characteristics.
Although, actually hearing the compliments would
automatically produce positivity, a possible need of this woman
and resemblance to the poem. Silverstein’s dialect delegates
connection with Kruger’s larger bold message, asking a
controversial question of who is the fairest, when many
individuals define fair with different value. Silverstein’s last
line in the poem reads, “But tell me the truth.” These last
words leave his readers with a slap in the face of reality,
similarly to Kruger’s last words in the message, “of them all.”
Both artists touch back to the bitterness of actuality, Kruger
88. with a mannerism to incorporate a group not missing a single
soul and Silverstein with the plainly simple truth.
Barbara Kruger captured much of my respect as I have found.
Her work holds originality with a hint of spunk in some of her
work, honesty in others, but concentration and charm in all.
Photographs and images in black and white shades attract a
lingering eye, while her use of red splashes one with interest.
In an article published on August 7, 2000, an unknown author
quotes Ms. Kruger’s purpose for her style, “I work with pictures
and words because they have the ability to determine who we
are and who we aren't,” a perfect theory for art, but more
importantly, a spectacular reason to craft.
