Joined: Sep. 2006
R.H.BROWN WANTS US TO INVEST IN HIS NEW WIDGET PLANT. ANY TAKERS?
I was talking with R.H.Brown the other day and he has a new investment for me. He wants me to invest $50,000 dollars in his new widget plant. He gaurantees me a 30% return on my investment over 5 years.
I read the prospectus and all the proper entries were there. Cost of capital (check), widget manufacturing rate (check), cost of building (check), raw material cost (check), labor cost (check), estimated sales figures of widgets (check), estimated price of widgets (check).
I was excited, but being a smart investor I wanted to cross-check a couple figures that R.H.Brown was quoting. So I checked on three things, cost of capital, widget price, and manufacturing rate.
The cost of capital was easy, I phoned the bank and they said that money could be borrowed at 9.5% and R.H.Brown quoted 9.0%. Maybe he knows someone.
The widget price was $22 wholesale price to the distributor with a retail cost of $36. Most stores start at $39.99 with periodic sales at $35 or lower. I looked up the prices for a whatsit, which the widget will compete with, and found out the whatsit was selling for $31.99 retail with some sales as low as $26. This relates to a wholesale price of $15. Uh-Oh!. Looks like R.H.Brown inflated the sale price by almost 50%, NOT GOOD.
The manufacturing rate of the facility was listed as 400,000 widgets per year. This rate turns out to be the maximum production rate of the machines the plant is installing if they ran day and night for a year. But the facility will only run two shifts M-F so R.H.Brown inflated the manufacturing rate by 50%.
Turns out that the labor cost quoted would have paid the workers a $3.50/hr wage rate also.
I talked to R.H.Brown about these discrepencies in his widget prospectus. He hummed and hawed for a second then said;
"Well, If you weren't promised at least a 30% return on your money you would not have invested with me. I had to make the details fit so they added up to a 30% return."
Needless to say I kept my money away from R.H.Brown.
I gave him your name Dave. I also said that Dave Hawkins wouldn't question those pesky detail numbers or how they were derived. Dave Hawkins would only notice the 30% return and accept that the details were accurate and derived properly.
If I run across any more investment opportunities Dave, I'll be sure to let you know.