Scenario

Your CEO has asked you to evaluate launching a new product line for your company. Based on your experience and

knowledge of the market, you have estimated the following results for the first five (5) years of the Project.

Expected revenues:

Year ('000s)

1 2 3 4 5

$80.00 $120.00 $200.00 $340.00 $460.00

The Company yearly purchases (COGS) from suppliers = 50% of the forecasted sales.

General and administrative expenses (wages, taxes, office etc.) are estimated at 15% of sales.

Sales salaries and commissions are estimated to be 10% of sales.

The Project requires and initial equipment investment of $150.

Annual depreciation expense of the equipment is $30.

Annual interest expense on the money borrowed to pay for the equipment is $6.

The company tax rate is 35%.

1. Question #1 - (10 marks)

Using the above projections and the template in Appendix A build a Pro-forma Income Statement for each year

of the Project.

In the template below the Income Statement calculate the Operating Cash Flows and Total Cash Flows for each

year.

2. Question #2 - (10 marks)

Using your initial investment and Total Cash Flows from Question #1 calculate the following for the Project.

a. Net Present Valueb. Payback (Breakeven)c. Discounted Payback (Breakeven)d. Internal Rate of Return e. Profitability Index

The company can borrow at 5% for the initial purchase of the equipment.

Question #3 - (10 marks - 300-500 words)

Based on questions 1 & 2 above, and the following management benchmarks, comment on whether the company

should move forward with the Project. What other things might you consider in making your decision?

Management Benchmark

a. Net Present Value Positive

b. Payback (Breakeven) < 4 years d. Internal Rate of Return > 20%

c. Profitability Index > 1 e. Discounted Payback (Breakeven) < 4 years