Spreadsheet printout(s) showing your derivation of
o Operating Cash Flows
o Incremental Cash Flows, including investment and salvage
o Warranty costs
o WACC
o NPV, IRR, Profitability Index, and Payback Period
o Scenario and Sensitivity
INFO
Exhibit 1
Sales forecasts: The forecasts are based on projected levels ofdemand. The firm could face weak, average, and strong demand. Allthe numbers are expressed in todayâs dollars. The forecastedaverage inflation per year is 2.5%.
Demand Level
Weak
Average
Strong
Probability
25%
45%
30%
Price per Refrigerator
$1,375
$1,575
$1,600
Units Sold Per Year
40,000
42,500
43,000
Labor cost per Refrigerator
$250
$250
$250
Parts
$300
$300
$300
Selling General And Admin.
$10,000,000
$10,000,000
$10,000,000
Average warranty cost per year per refrigerator for the firstfive years is $75. The present value of this cost will be used as acost figure for each refrigerator. Afterwards, the refrigeratorowners will become responsible the repairs.
Exhibit 2
Compressor Price
Compressor model number
CM - 004
TS - L12
Price per Compressor and Installation
$280
$260
Average annual warranty cost per year for five years.Afterwards, the refrigerator owner will became responsible
$40
$50
The chosen compressor will be installed in every refrigeratorand will become a cost figure for each unit produced. * Thecompressor manufacturers are not providing Tesca Works with anywarranty. However, Tesca Works will provide warranty to itscustomers. After the initial five years, the refrigerator ownersmay purchase extended warranty from any insurance company thatoffers such packages.
Investment needs:
Year 0
Year 1
Year 2
Year 3
$3 million
$5 million
$3 million
Production and selling of commercial appliances starts
Straight line depreciation will be used. To facilitate theoperation of manufacturing the refrigerators, the company will haveto allocate funds to net working capital (NWC) equivalent to 11% ofannual sales. The investment in NWC will be recovered at the end ofthe project.
Exhibit 4 Financing
Historically, the company tried to maintain a debt to equityratio equal to 0.60. This ratio was used because lowering the debtimplies giving up the debt tax shield and increasing it makes debtservice a burden on the firmâs cash flow. In addition, increasingthe debt level may cause a reduced rating of the companyâs bonds.The marginal tax rate is 25%. All the numbers are expressed intodayâs dollars. The forecasted average inflation per year is2.5%.
Cost of debt: The companyâs bond rating is roughly at the highend of the A range. Surveying the debt market yielded the followinginformation about the cost of debt for different rating levels:
Bond Rating
AA
A
BBB
Interest Cost Range
3.5% - 3.75%
3.75% - 4.5%
4.50% - 5.00%
Cost of equity: The current 10-year Treasury notes have a yieldto maturity of 2.71% and the five year rolling average for theS&P 500 market return is 11.0%. The companyâs overall b is1.3.
Company
Tesca Works
Electrics Plus
General Generators
Universal Power
Generators Inc
International Generators
Over all B
1.3
1.4
1.3
1.6
1.2
1.35
Debt to Equity
0.4
0.3
0.5
0.45
0.35
0.25
Percentage of income from generators
50
45
90
95
85
85
Spreadsheet printout(s) showing your derivation of
o Operating Cash Flows
o Incremental Cash Flows, including investment and salvage
o Warranty costs
o WACC
o NPV, IRR, Profitability Index, and Payback Period
o Scenario and Sensitivity
INFO
Exhibit 1
Sales forecasts: The forecasts are based on projected levels ofdemand. The firm could face weak, average, and strong demand. Allthe numbers are expressed in todayâs dollars. The forecastedaverage inflation per year is 2.5%.
Demand Level | Weak | Average | Strong |
Probability | 25% | 45% | 30% |
Price per Refrigerator | $1,375 | $1,575 | $1,600 |
Units Sold Per Year | 40,000 | 42,500 | 43,000 |
Labor cost per Refrigerator | $250 | $250 | $250 |
Parts | $300 | $300 | $300 |
Selling General And Admin. | $10,000,000 | $10,000,000 | $10,000,000 |
Average warranty cost per year per refrigerator for the firstfive years is $75. The present value of this cost will be used as acost figure for each refrigerator. Afterwards, the refrigeratorowners will become responsible the repairs.
Exhibit 2
Compressor Price
Compressor model number | CM - 004 | TS - L12 |
Price per Compressor and Installation | $280 | $260 |
Average annual warranty cost per year for five years.Afterwards, the refrigerator owner will became responsible | $40 | $50 |
The chosen compressor will be installed in every refrigeratorand will become a cost figure for each unit produced. * Thecompressor manufacturers are not providing Tesca Works with anywarranty. However, Tesca Works will provide warranty to itscustomers. After the initial five years, the refrigerator ownersmay purchase extended warranty from any insurance company thatoffers such packages.
Investment needs:
Year 0 | Year 1 | Year 2 | Year 3 |
$3 million | $5 million | $3 million | Production and selling of commercial appliances starts |
Straight line depreciation will be used. To facilitate theoperation of manufacturing the refrigerators, the company will haveto allocate funds to net working capital (NWC) equivalent to 11% ofannual sales. The investment in NWC will be recovered at the end ofthe project.
Exhibit 4 Financing
Historically, the company tried to maintain a debt to equityratio equal to 0.60. This ratio was used because lowering the debtimplies giving up the debt tax shield and increasing it makes debtservice a burden on the firmâs cash flow. In addition, increasingthe debt level may cause a reduced rating of the companyâs bonds.The marginal tax rate is 25%. All the numbers are expressed intodayâs dollars. The forecasted average inflation per year is2.5%.
Cost of debt: The companyâs bond rating is roughly at the highend of the A range. Surveying the debt market yielded the followinginformation about the cost of debt for different rating levels:
Bond Rating | AA | A | BBB |
Interest Cost Range | 3.5% - 3.75% | 3.75% - 4.5% | 4.50% - 5.00% |
Cost of equity: The current 10-year Treasury notes have a yieldto maturity of 2.71% and the five year rolling average for theS&P 500 market return is 11.0%. The companyâs overall b is1.3.
Company | Tesca Works | Electrics Plus | General Generators | Universal Power | Generators Inc | International Generators |
Over all B | 1.3 | 1.4 | 1.3 | 1.6 | 1.2 | 1.35 |
Debt to Equity | 0.4 | 0.3 | 0.5 | 0.45 | 0.35 | 0.25 |
Percentage of income from generators | 50 | 45 | 90 | 95 | 85 | 85 |
