AGOURA MANUFACTURING MINI-CASE
Agoura Manufacturing has announced the introduction of a new product. They forecast product- specific sales demand to last five years. Then because this product is somewhat of a fad, they will terminate the project. Manufacturing of the product will require the acquisition of an existing facility and purchase and installation of some new equipment. The following information describes the new project:
Capital Investment requirement:
Cost of new plant and equipment: $13,750,000 Shipping and installation costs: $ 465,000
Working Capital requirements:
An initial working-capital requirement of $350,000 will accompany the start of production. After that, total investment in net working capital during each year will be equal to 16 percent of the dollar value of sales for that year. Therefore, the working capital investment required will increase during years 1 through 3, decrease in year 4, and finally, all working capital is converted to cash at the termination of the project at the end of year 5.
Sales Forecast:
|
Year |
Units Sold |
|
1 |
75,000 |
|
2 |
115,000 |
|
3 |
195,000 |
|
4 |
75,000 |
|
5 |
45,000 |
Sales price per unit: $275/unit in years 1–4, $180/unit in year 5 Variable cost per unit: $215/unit
Annual fixed costs: $675,000
Other Assumptions:
Agoura Manufacturing uses the simplified straight-line depreciation method over useful life. The plant and equipment will have no salvage value after five years. Agoura Manufacturing pays taxes at a 34% marginal rate. Their cost of capital is 17%, and this project offers a similar risk profile to the company’s overall operations.
Solution:-
| Computation of Cash Inflow(All Values In Dollars) | |||||
| Amount | |||||
| Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Estimated Sales | 2,06,25,000.00 | 3,16,25,000.00 | 5,36,25,000.00 | 2,06,25,000.00 | 81,00,000.00 |
| Less:Estimated Variable Cost | 1,61,25,000.00 | 2,47,25,000.00 | 4,19,25,000.00 | 1,61,25,000.00 | 96,75,000.00 |
| Contribution | 45,00,000.00 | 69,00,000.00 | 1,17,00,000.00 | 45,00,000.00 | -15,75,000.00 |
| Less:Fixed Cost | 6,75,000.00 | 6,75,000.00 | 6,75,000.00 | 6,75,000.00 | 6,75,000.00 |
| EBDIT | 38,25,000.00 | 62,25,000.00 | 1,10,25,000.00 | 38,25,000.00 | -22,50,000.00 |
| Less:Depreciation | 28,43,000.00 | 28,43,000.00 | 28,43,000.00 | 28,43,000.00 | 28,43,000.00 |
| EBT | 9,82,000.00 | 33,82,000.00 | 81,82,000.00 | 9,82,000.00 | -50,93,000.00 |
| Less:TAX | 3,33,880.00 | 11,49,880.00 | 27,81,880.00 | 3,33,880.00 | - |
| EAT(Earning after Tax) | 6,48,120.00 | 22,32,120.00 | 54,00,120.00 | 6,48,120.00 | -50,93,000.00 |
| Add:Depreciation | 28,43,000.00 | 28,43,000.00 | 28,43,000.00 | 28,43,000.00 | 28,43,000.00 |
| Cash Inflow | 34,91,120.00 | 50,75,120.00 | 82,43,120.00 | 34,91,120.00 | -22,50,000.00 |
| Computation of PV of CIF(Cash In Flow) | |||||
| Year | CIF | PV Factor@17% | Amount | ||
| Year 1 | 34,91,120.00 | 0.855 | 29,84,907.60 | ||
| Year 2 | 50,75,120.00 | 0.731 | 37,09,912.72 | ||
| Year 3 | 82,43,120.00 | 0.624 | 51,43,706.88 | ||
| Year 4 | 34,91,120.00 | 0.534 | 18,64,258.08 | ||
| Year 5 | -22,50,000.00 | 0.456 | -10,26,000.00 | ||
| Initial Working Capital | 3,50,000.00 | ||||
| 1,26,76,785.28 | |||||
| PV of COF 0 | 1,45,65,000.00 | 1,45,65,000.00 | |||
| NPV(Net Present Value) | -18,88,214.72 |
Reccomendation:Agoura Cannot accept the Project.Becuase in the above project Net Present Value (NPV)is in negative.So,he can not accept the project.In the Above solution we can see that the NPV is $ 18,88,214.72.
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