Polymold Division Manufactures

Polymold Division

The Polymold Division manufactures high-quality precision molds with interchangeable parts and is trying to determine if the CAD/CAM is a good investment. Divisional manager, Mr. Martin, feels that if Polymold does not invest in the computer-aided design and manufacturing system, the company would lose some of its market share and sales would decline. With the current market, Mr. Martin feels that even though we have increased market share in the recessionary period of declining sales, that we are not keeping pace with our closest competitors and that our high level of quality products is also declining compared to our more technology-advanced competitors.

Before we forecast the division’s financial statements and we project any numbers, there are first a few assumptions we need to take in mind. We assume that if we do purchase the CAD/CAM, sales would increase to 7.3% (varying from 6.3-7.7%) and if we don’t purchase the system, our market share would decrease to 4.2%. We also assume that cost of goods sold will rise to 77% by 1988 from 73% today. Lastly, we assume the 50% tax rate used by Mr. Martin in his projections. With these assumptions in mind we can begin to forecast the division’s growth and sales for the next for years.

According to Exhibit 3, our sales in 1982 are $10.8 million and are forecasted to grow (at an average growth rate) from 1983 to 1987. With these assumptions and forecasts in mind, we can project an income statement for 1983 to 1987. By taking the forecasted sales less the cost of goods sold, general, and administrative expenses you get the pre-tax earnings. We then take the pre-tax earnings and subtract it by 1 minus the 50% tax rate, giving us the after-tax earnings. This would be our strategy if we do not invest in the CAD/CAM. However, if we did purchase the CAD/CAM we must consider the increase in depreciation, capital expenditures, and tax credits