Cameron Lopez was having a roller-coaster type of day and was trying to make sense of...

  

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Cameron Lopez was having a roller-coaster type of day and was trying to make sense of it all as she sipped her Starbucks Mocha-Frappuccino in the departure lounge in San Francisco Airport. Cameron is the CEO of an in-line skates, electric and non-electric scooter manufacturing company called Scooter Lifestyles Incorporated ("SLI"). She had just come from an intense meeting at Lime, a scooter and bike rideshare company headquartered in San Francisco. After months of negotiating, Lime and Cameron are close to signing an agreement for SLI to supply electric scooters to Lime over the next 5 years. Lime has agreed to pay SLI $325 per scooter for a road-sturdy scooter that meets Lime's specifications. They will purchase 10,000 scooters in the first year of the contract and 12,000 scooters for each of the remaining 4 years. It will cost SLI $195 to manufacture each scooter thus COGS is 60% of revenues. All of this sounded great to Cameron, but she knew that this block of business would require SLI to open a new manufacturing facility in Claremont, New Hampshire. She already paid a property management company $100,000 to spec out and receive permitting for an existing factory in that city. The cost of all the required equipment would be $1,400,000 and the leasehold improvements would cost $140,000, both of which would be depreciated over 7 years. The annual rental for this facility would be $300,000 in the first year escalating by $10,000 in the second year and staying constant thereafter. A rent deposit of $75,000 is due at time 0 and this will not be on the balance sheet but run through the income statement. She estimates she would require a Net Working Capital investment of $35,000 up front and thereafter the NWC Balance will be 10% of the sales until the final (5th) year. Cameron thinks SLI could recover all the working capital that they have invested, in the final year. Once the contract with Lime terminates in 5 years, SLI's lease in Claremont would also terminate. She also estimates that they could sell off any useful property, plant and equipment for $200,000. Cameron knows, from their existing plants, that for years 1-5 SLI's costs other than rent and depreciation is 15% of sales. SLI's federal tax rate is 21% and in New Hampshire their State Corporate Tax rate is 8%. The company assumes no tax break at time 0 for the $50,000 payment in rent (and no tax loss carryforward). Cameron can remember the new intern from Questrom School of Business mentioned in their interview that he had calculated SLI's cost of capital at 12%. Cameron suddenly had an epiphany, maybe she could get that intern to figure out if it was worth entering into this new contract with Lime, what would the value of it be and what sort of return could she expect. The intern couldn't stop talking about this Core project thing he had done so maybe he could put that to good use Cameron thought as she finally boarded her Delta Flight. Cameron Lopez was having a roller-coaster type of day and was trying to make sense of it all as she sipped her Starbucks Mocha-Frappuccino in the departure lounge in San Francisco Airport. Cameron is the CEO of an in-line skates, electric and non-electric scooter manufacturing company called Scooter Lifestyles Incorporated ("SLI"). She had just come from an intense meeting at Lime, a scooter and bike rideshare company headquartered in San Francisco. After months of negotiating, Lime and Cameron are close to signing an agreement for SLI to supply electric scooters to Lime over the next 5 years. Lime has agreed to pay SLI $325 per scooter for a road-sturdy scooter that meets Lime's specifications. They will purchase 10,000 scooters in the first year of the contract and 12,000 scooters for each of the remaining 4 years. It will cost SLI $195 to manufacture each scooter thus COGS is 60% of revenues. All of this sounded great to Cameron, but she knew that this block of business would require SLI to open a new manufacturing facility in Claremont, New Hampshire. She already paid a property management company $100,000 to spec out and receive permitting for an existing factory in that city. The cost of all the required equipment would be $1,400,000 and the leasehold improvements would cost $140,000, both of which would be depreciated over 7 years. The annual rental for this facility would be $300,000 in the first year escalating by $10,000 in the second year and staying constant thereafter. A rent deposit of $75,000 is due at time 0 and this will not be on the balance sheet but run through the income statement. She estimates she would require a Net Working Capital investment of $35,000 up front and thereafter the NWC Balance will be 10% of the sales until the final (5th) year. Cameron thinks SLI could recover all the working capital that they have invested, in the final year. Once the contract with Lime terminates in 5 years, SLI's lease in Claremont would also terminate. She also estimates that they could sell off any useful property, plant and equipment for $200,000. Cameron knows, from their existing plants, that for years 1-5 SLI's costs other than rent and depreciation is 15% of sales. SLI's federal tax rate is 21% and in New Hampshire their State Corporate Tax rate is 8%. The company assumes no tax break at time 0 for the $50,000 payment in rent (and no tax loss carryforward). Cameron can remember the new intern from Questrom School of Business mentioned in their interview that he had calculated SLI's cost of capital at 12%. Cameron suddenly had an epiphany, maybe she could get that intern to figure out if it was worth entering into this new contract with Lime, what would the value of it be and what sort of return could she expect. The intern couldn't stop talking about this Core project thing he had done so maybe he could put that to good use Cameron thought as she finally boarded her Delta Flight.