Toefield Inc. has developed a powerful efficient snow remover that is significantly less polluting than existing...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Toefield Inc. has developed a powerful efficient snow remover that is significantly less polluting than existing snow removers currently on the market. The company spent $2,000,000 developing this product and the marketing department spent another $300,000 to assess the market demand. It would cost $20 million at Year 0 to buy the equipment necessary to manufacture the efficient snow blower. The project would require net working capital at the beginning of each year equal to 20% of sales (NOWC0 = 20% (Sales1), NOWC1 = 20%(Sales2), etc.). The efficient snow blowers would sell for $3,000 per unit, and Toefield believes that variable costs would amount to $790 per unit. The company expects that the sales price and variable costs would increase at the inflation rate of 2% after year 1. The company's non-variable costs would be $800,000 in Year 1 and are expected to increase with inflation. The efficient snow blower project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 5,000 units per year. The equipment would be depreciated using a CCA rate of 30%. The estimated market value of the equipment at the end of the project's 4- year life is $500,000. Toefield has other assets in this asset class. Toefield Inc.'s federal-plus-provincial tax rate is 30%. Its cost of capital is 9% for average risk projects. Low-risk projects are evaluated with a WACC of 6%, and high-risk projects at 12%. a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. Part 1. Input Data (in thousands of dollars except for unit amount) Equipment cost Net Operating WC/sales Yearly sales (in units) Sales price per unit Variable cost per unit Non-variable costs Part 2. CCA Schedule Years year 1 year 2 year 3 year 4 Beg. UCC 20,000 17,000 11,900 8,330 CCA 3,000 5,100 3,570 2,499 20,000 20% End UCC 5,000 $3.00 $0.79 $800 $17,000 $11,900 $8,330 $5,831 Key Output: NPV = IRR = MIRR= Market value of equipment at Year 4 Tax rate WACC Inflation CCA rate $500 30% 9% 2.0% 30.0% Part 3. Projected Net Cash Flows (Time line of annual cash flows) Investment Outlays at Time Zero: Equipment Operating Cash Flows over the Project's Life: Units sold Sales price Variable costs Sales revenue Variable costs Non-variable operating costs Depreciation (equipment) Years Oper. income before taxes (EBIT) Taxes on operating income (40%) Net Operating Profit After Taxes (NOPAT) Add back depreciation Operating cash flow Net Working Capital: Required level of net operating working capital Required investment in NOWC Terminal Year Cash Flows: Net salvage value Net Cash Flow (Time line of cash flows) Part 4. Key Output: Appraisal of the Proposed Project Net Present Value (at 9%) IRR MIRR Payback (See calculation below) 0 $ 20,000 1 5,000 $3.00 $0.81 800 2 5,000 $3.06 800 3 5,000 $3.12 800 4 5,000 $3.18 800 Data for Payback Years % Deviation from Base Case -25% -10% 0% 10% 25% % Deviation from b. Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables' values at 10% and 25% above and below their base case values. Include a graph in your analysis. Evaluating Risk: Sensitivity Analysis I. Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV for different unit sales, variable costs, WACC, and sales prices, holding other thing constant. Base Case -25% -10% Net cash flow Cumulative CF Part of year required for payback: 0% 10% 25% 1st YEAR UNIT SALES Units Sold NPV $0 $0 $0 $0 $0 $0 VARIABLE COSTS Variable Costs NPV $0 $0 $0 $0 $0 $0 % Deviation from Base Case -25% -10% 0% 10% 25% % Deviation from Base Case 0.00 -25% -10% 0% 10% 25% WACC WACC 0.00 Sales Price SALES PRICE NPV 0 $0 $0 $0 $0 $0 0.00 NPV $0 $0 $0 $0 $0 $0 0.00 % Deviation |NON-VARIABLE COSTS from Base Case NPV $0 $0 $0 $0 $0 $0 NPV -25% -10% 0% 10% 25% Fixed Costs $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 ($1,000) ($3,000) ($5,000) ($7,000) -20% -10% Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example the base case number of units sold in cell B100 should be the number 1000; you should NOT have the formula =D29 in that cell. This is because you'll use D29 as the column input cell in the data table and if Excel tries to iteratively replace cell D29 with the formula =D29 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table! Sensitivity Analysis 0% 10% 20% Sales price VC -Units Non-var. cost WACC Deviation from Base Case -25% -10% 0% 10% 25% Sales Price Range $ $ NPV at Different Deviations from Base Variable Cost Non-variable Cost Units Sold c. Would you recommend that the project be accepted? Explain. 0 $ $ WACC Note: Copy the results from the sensitivity analysis into this table. Toefield Inc. has developed a powerful efficient snow remover that is significantly less polluting than existing snow removers currently on the market. The company spent $2,000,000 developing this product and the marketing department spent another $300,000 to assess the market demand. It would cost $20 million at Year 0 to buy the equipment necessary to manufacture the efficient snow blower. The project would require net working capital at the beginning of each year equal to 20% of sales (NOWC0 = 20% (Sales1), NOWC1 = 20%(Sales2), etc.). The efficient snow blowers would sell for $3,000 per unit, and Toefield believes that variable costs would amount to $790 per unit. The company expects that the sales price and variable costs would increase at the inflation rate of 2% after year 1. The company's non-variable costs would be $800,000 in Year 1 and are expected to increase with inflation. The efficient snow blower project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project's returns are expected to be highly correlated with returns on the firm's other assets. The firm believes it could sell 5,000 units per year. The equipment would be depreciated using a CCA rate of 30%. The estimated market value of the equipment at the end of the project's 4- year life is $500,000. Toefield has other assets in this asset class. Toefield Inc.'s federal-plus-provincial tax rate is 30%. Its cost of capital is 9% for average risk projects. Low-risk projects are evaluated with a WACC of 6%, and high-risk projects at 12%. a. Develop a spreadsheet model and use it to find the project's NPV, IRR, and payback. Part 1. Input Data (in thousands of dollars except for unit amount) Equipment cost Net Operating WC/sales Yearly sales (in units) Sales price per unit Variable cost per unit Non-variable costs Part 2. CCA Schedule Years year 1 year 2 year 3 year 4 Beg. UCC 20,000 17,000 11,900 8,330 CCA 3,000 5,100 3,570 2,499 20,000 20% End UCC 5,000 $3.00 $0.79 $800 $17,000 $11,900 $8,330 $5,831 Key Output: NPV = IRR = MIRR= Market value of equipment at Year 4 Tax rate WACC Inflation CCA rate $500 30% 9% 2.0% 30.0% Part 3. Projected Net Cash Flows (Time line of annual cash flows) Investment Outlays at Time Zero: Equipment Operating Cash Flows over the Project's Life: Units sold Sales price Variable costs Sales revenue Variable costs Non-variable operating costs Depreciation (equipment) Years Oper. income before taxes (EBIT) Taxes on operating income (40%) Net Operating Profit After Taxes (NOPAT) Add back depreciation Operating cash flow Net Working Capital: Required level of net operating working capital Required investment in NOWC Terminal Year Cash Flows: Net salvage value Net Cash Flow (Time line of cash flows) Part 4. Key Output: Appraisal of the Proposed Project Net Present Value (at 9%) IRR MIRR Payback (See calculation below) 0 $ 20,000 1 5,000 $3.00 $0.81 800 2 5,000 $3.06 800 3 5,000 $3.12 800 4 5,000 $3.18 800 Data for Payback Years % Deviation from Base Case -25% -10% 0% 10% 25% % Deviation from b. Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the sales price, variable costs per unit, and number of units sold. Set these variables' values at 10% and 25% above and below their base case values. Include a graph in your analysis. Evaluating Risk: Sensitivity Analysis I. Sensitivity of NPV to Changes in Inputs. Here we use an Excel "Data Table" to find NPV for different unit sales, variable costs, WACC, and sales prices, holding other thing constant. Base Case -25% -10% Net cash flow Cumulative CF Part of year required for payback: 0% 10% 25% 1st YEAR UNIT SALES Units Sold NPV $0 $0 $0 $0 $0 $0 VARIABLE COSTS Variable Costs NPV $0 $0 $0 $0 $0 $0 % Deviation from Base Case -25% -10% 0% 10% 25% % Deviation from Base Case 0.00 -25% -10% 0% 10% 25% WACC WACC 0.00 Sales Price SALES PRICE NPV 0 $0 $0 $0 $0 $0 0.00 NPV $0 $0 $0 $0 $0 $0 0.00 % Deviation |NON-VARIABLE COSTS from Base Case NPV $0 $0 $0 $0 $0 $0 NPV -25% -10% 0% 10% 25% Fixed Costs $11,000 $9,000 $7,000 $5,000 $3,000 $1,000 ($1,000) ($3,000) ($5,000) ($7,000) -20% -10% Note about data tables. The data in the column input should NOT be input using a cell reference to the column input cell. For example the base case number of units sold in cell B100 should be the number 1000; you should NOT have the formula =D29 in that cell. This is because you'll use D29 as the column input cell in the data table and if Excel tries to iteratively replace cell D29 with the formula =D29 rather than a series of numbers, Excel will calculate the wrong answer. Unfortunately, Excel won't tell you that there is a problem, so you'll just get the wrong values for the data table! Sensitivity Analysis 0% 10% 20% Sales price VC -Units Non-var. cost WACC Deviation from Base Case -25% -10% 0% 10% 25% Sales Price Range $ $ NPV at Different Deviations from Base Variable Cost Non-variable Cost Units Sold c. Would you recommend that the project be accepted? Explain. 0 $ $ WACC Note: Copy the results from the sensitivity analysis into this table.
Expert Answer:
Answer rating: 100% (QA)
Part1 In thousands of dollars except for unit amount Equipment cost 20000 Net WCsales 2100 Tax rate 30 Yearly salesunits 3500 WACC 6 for high risk pro... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324272055
10th edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
Students also viewed these finance questions
-
Toefield Inc. has developed a powerful efficient snow remover that is significantly less polluting than existing snow removers currently on the market. The company spent $2,000,000 developing this...
-
Webmasters.com has developed a powerful new server that would be used for corporations Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to manufacture the...
-
Website. Webmasters.com has developed a powerful new server that would be used for corporations Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to manufacture...
-
A hospital radiology department has the following activities: Activity Number Activity Description 1 Repair X-ray equipment 2 Taking X-ray with X-ray...
-
Lane Kohler opened a law office, which he operates as a professional corporation. The name of the new entity is Lane Kohler, Attorney and Counselor, Professional Corporation (P.C.). Kohler...
-
1. Where do you think this negotiation will end up? 2. What would you have done if you were James? 3. When dealing with conflict, do you think about how to begin? 4. What are other types of opening...
-
When the plaintiff was 16, he was employed by Kmart as a cashier. At the end of his training, he was required to read Kmarts policy agreement, which included an agreement to submit all employment...
-
1. Trace the path of the medication list and denote possible failure points. Construct a process flowchart of the existing process and create a new chart of an improved process. 2. Was the medication...
-
Create a table in excel showing net present value calculation for the following scenario. You will have a column with time period, future value, and present value included. You can anticipate that...
-
Determine the largest intensity w 0 of the distributed load that the beam can support if the beam can withstand a maximum shear force of V max = 1200 lb and a maximum bending moment of M max = 600 lb...
-
Consider a point P moving in the complex plane in a counterclockwise direction around a circle of radius one and center at the origin. Describe what happens to the image of P under the complex...
-
What type of information is provided by each type of statement?
-
Debate the impact of digital technology on the way we live, work and enjoy ourselves by focusing on freedoms and limitations.
-
Does the cash budget require an extensive knowledge of accounting principles?
-
Explore the options, success factors and barriers to delivering artificial intelligence and Big Data applications for marketing.
-
Explain how digital channels have altered how companies can differentiate their brands online.
-
Pine Inc. provided services to a customer worth $2,000 on April 28 and recorded no journal entry. It received the payment from the customer on May 3. What adjustment is needed at the end of April,...
-
Hotel Majestic is interested in estimating fixed and variable costs so that the company can make more accurate projections of costs and profit. The hotel is in a resort area that is particularly busy...
-
Adel Sporting Goods recently reported the following income statement and balance sheet. INCOME STATEMENT Sales........................................... $4,200 Operating...
-
How should a manager determine the capital structure weights that are used to calculate the WACC?
-
Cooley Textile's 2001 financial statements are shown below. Cooley Textile: Income Statement for December 31, 2001 (Thousands of Dollars) Sales........................................................
-
The state of stress at a point is given by a. Determine the strains using Young's modulus of \(100 \mathrm{GPa}\) and Poisson's ratio of 0.25. b. Compute the strain energy density using these...
-
Consider the state of stress in problem 32. The yield strength of the material is \(100 \mathrm{MPa}\). Determine the safety factors according to: (a) maximum principal stress criterion, (b) Tresca...
-
A thinwalled tube is subject to a torque T. The only nonzero stress component is the shear stress \(\tau_{x y}\), which is given by \(\tau_{x y}=10,000 T(\mathrm{~Pa})\), where \(T\) is the torque in...
Study smarter with the SolutionInn App