Forecasting Case - Scooter Lifestyles Inc.

Jason Bourne, the Questrom Intern who was working at SLI for the summer had one last assignment to complete before he headed back to Commonwealth Avenue. He had done a great job putting together the Discounted Cash Flow to evaluate whether his company, SLI, should sign a contract to manufacture and supply Lime Inc. with electric scooters.

His CEO, Cameron Lopez, thinks this project is such a good idea that she is going to spin the project off as its own standalone business, requiring its own investment (all Equity funding) and potentially payingoutdividendstoitsinvestors.CameronwantsJasontofinetunehismodelanduseittofigure out:

2. How much External Investment they would need and in which years would it beneeded?
4. Could the business pay any dividends, when and how much?And,
6. What is the IRR andNPV if the project was launch on a stand-alone basis?

Required:

Using the excel file provided:

2. Calculate the amount of Property, Plant & Equipment (Gross) assuming no additions to these balances are made during the periods. Calculate the accumulated depreciation amounts for each period.
4. Compute the working capital account balances (i.e., Cash, Account Receivable, Inventory, Accounts payable) for each period.
6. Calculate the Cash Surplus/(Deficit) for each of the years using the Cash Flow Statement section of the projections.
8. Compute retained earnings at the end of each year (beginning with Time 0).
10. Input the retained earnings & paid in capital amounts in the Balance Sheet section of the projection worksheet for each of the periods.

Bring your work to class next week. We will complete the Cash Flow Statement, determine Paid in Capital and calculate the Net Present Value and Internal Rate of Return during class.

Assumptions:

•  
• The business would need a Cash Balance (Current Asset) to operate the business and it would be equal to 7% of Revenues. He can consider it just part of Net Working Capital.
•  
• Their Accounts receivable would be 30 days of sales (DSO) and stay constant throughout.
• In the startup period they would need $35,000 of inventory, but thereafter their Inventory Days (DOH) would stay constant at 60days.
• Property, plant & equipment will be depreciated over 7 year using the straight-line method.
• Their Accounts Payable Days would be 25 days and stay constant through out.
• InsteadofusingSalvageValueoftheEquipmentinyear5,hewoulduseaTerminalValue.The assumption he would use is that the FCF in Year 6 would decline by 10% from Year 5 and declineat10%foreveryyearinperpetuitythereafter.Thatis:itwillbeaGrowingPerpetuity, but with a negative 10% growth rate.
• If the Company has a shortfall (Deficit) in Cash Flow in any given year it would be funded by an External Investor through equity.
• If the Company has an excess (Surplus) in Cash Flow in any given year it would pay all the excess cash out as a dividend to shareholders.

New Retained Earnings = Old Retained Earnings + New Net Income - New Dividends Paid

Growing Perpetuity: PV

T-1

= CT

(r-g)

INCOME STATEMENT	Time 0	Year1 Year2 Year3 Year4 Year5
Sales				3,250,000 3,900,000 3,900,000 3,900,000 3,900,000
COGs and Other Operating Costs	75%			(2,437,500) (2,925,000) (2,925,000) (2,925,000) (2,925,000)
Rental Costs			(100,000)	(300,000) (310,000) (310,000) (310,000) (310,000)
Depreciation				(220,000) (220,000) (220,000) (220,000) (220,000)
Earnings Before Tax			(100,000)	292,500 445,000 445,000 445,000 445,000
Tax	29%		-	(84,825) (129,050) (129,050) (129,050) (129,050)
Earnings After Tax		$	(100,000)$	207,675 $ 315,950 $ 315,950 $ 315,950 $ 315,950

Scooter Lifestyles Inc.
Discount Rate	12%		1	2	3	4	5
Perpetuity Decline Rate	-10%
Manufacturers Price Per Unit			$ 325.00	$ 325.00	$ 325.00	$ 325.00	$ 325.00
Units Sold			10,000	12,000	12,000	12,000	12,000
INCOME STATEMENT		Time 0	Year 1	Year 2	Year 3	Year 4	Year 5
Sales			3,250,000	3,900,000	3,900,000	3,900,000	3,900,000
COGs and Other Operating Costs	75%		(2,437,500)	(2,925,000)	(2,925,000)	(2,925,000)	(2,925,000)
Rental Costs		(100,000)	(300,000)	(310,000)	(310,000)	(310,000)	(310,000)
Depreciation			(220,000)	(220,000)	(220,000)	(220,000)	(220,000)
Earnings Before Tax		(100,000)	292,500	445,000	445,000	445,000	445,000
Tax	29%		(84,825)	(129,050)	(129,050)	(129,050)	(129,050)
Earnings After Tax		$ (100,000)	$ 207,675	$ 315,950	$ 315,950	$ 315,950	$ 315,950
Retained Earnings (Start of Period)		-	-	-	-	-	-
Earnings
Dividends
Retained Earnings (End of Period)		-	-	-	-	-	-
BALANCE SHEET		Time 0	Year 1	Year 2	Year 3	Year 4	Year 5
Property, Plant & Equipment (Gross)
Accumulated Depreciation
Net PP& E		-	-	-	-	-	-
Cash	7%
Accounts Recevable	30
Inventory	60
Total Current Assets		-	-	-	-	-	-
Total Assets		-	-	-	-	-	-
Accounts Payable	25
Paid In Capital
Retained Earnings
Total Shareholders Equity		-	-	-	-	-	-
Total Liabilities and S.H. Equity		-	-	-	-	-	-
CHECK - Difference (Assets - Liabilities)		-	-	-	-	-	-	DO NOT CHANGE THIS ROW
Net Working Capital
CASH FLOW STATEMENT		Time 0	Year 1	Year 2	Year 3	Year 4	Year 5
Net Income
Addback Depreciation
Cash Impact of Change in Net Working Capital
Capital Expenditure
FCF Cash SURPLUS/(DEFICIT)		-	-	-	-	-	-
Terminal Value
FCF Cash SURPLUS/(DEFICIT) with T.V.		-	-	-	-	-	-
NPV
IRR