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Project Alpha -- capital required: $1,250,000, March 1, next year 

Project Beta – capital required: $240,000 per month, Dec. this year through and including the next two years 

Pension funding through the next three calendar years, including this year (our underwriters advise that an annual funding of $4,500,000, due at the end of December, will be needed for this year, with increases thereafter of 7% per annum) 

Purchase of a Tesla Roadster for the Chairman of the Board (for his birthday next April) at $101,500. 

Management retention bonuses for this year and next year, each payable, as usual, in March of the following year, not to exceed $10 million per year. These are all special projects, requiring funding from sources other than operating revenues. I will handle scheduling the appropriate deposits into the Special Capital account at Penultimate National Bank and, except as specified below, you are not to concern yourselves with where funding may be obtained, only with how much will be needed. Also, sinking fund requirements for the Series of 2025 Subordinated Debentures will be funded from the Special Capital account in single payments at the end of next year and the year after, only (that is, no more than two years of sinking fund payments need be funded – disregard any payments for this year and future payments beyond the two-year period). The indenture requires redemption of 2% of the $600 million issue per year. Retirement of the balance of the bonds will be funded elsewhere. At the last meeting, the Board accepted the offer of Western Widgets for purchase of our widget winding facility in West Winona which will produce net proceeds in the amount of $16,500,000. This sale will be completed this month, and on the first of next month I will be depositing those funds in the Penultimate National Bank Special Capital account at 2.5% to provide at least a start on funding these projects. (This same 2.5% rate should be used for all discounting computations without regard to the company’s cost of capital). In addition, it is possible, but not certain, that the Wilmer Widget Wrapping plant may also be sold for as much as $20 million (net) in June of next year. Since this is not certain, it should be treated as an alternative partial solution to the cash needs problem.

Please prepare the following for distribution to the Board Members. **A cash requirements budget for the above expenditures.

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Jean Keeling
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28 Sep 2019

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Project Alpha -- capital required: $1,250,000, March 1, next year 

Project Beta – capital required: $240,000 per month, Dec. this year through and including the next two years 

Pension funding through the next three calendar years, including this year (our underwriters advise that an annual funding of $4,500,000, due at the end of December, will be needed for this year, with increases thereafter of 7% per annum) 

Purchase of a Tesla Roadster for the Chairman of the Board (for his birthday next April) at $101,500.  Management retention bonuses for this year and next year, each payable, as usual, in March of the following year, not to exceed $10 million per year. These are all special projects, requiring funding from sources other than operating revenues. I will handle scheduling the appropriate deposits into the Special Capital account at Penultimate National Bank and, except as specified below, you are not to concern yourselves with where funding may be obtained, only with how much will be needed. Also, sinking fund requirements for the Series of 2025 Subordinated Debentures will be funded from the Special Capital account in single payments at the end of next year and the year after, only (that is, no more than two years of sinking fund payments need be funded – disregard any payments for this year and future payments beyond the two-year period). The indenture requires redemption of 2% of the $600 million issue per year. Retirement of the balance of the bonds will be funded elsewhere. At the last meeting, the Board accepted the offer of Western Widgets for purchase of our widget winding facility in West Winona which will produce net proceeds in the amount of $16,500,000. This sale will be completed this month, and on the first of next month I will be depositing those funds in the Penultimate National Bank Special Capital account at 2.5% to provide at least a start on funding these projects. (This same 2.5% rate should be used for all discounting computations without regard to the company’s cost of capital). In addition, it is possible, but not certain, that the Wilmer Widget Wrapping plant may also be sold for as much as $20 million (net) in June of next year. Since this is not certain, it should be treated as an alternative partial solution to the cash needs problem.

***Create your estimate of the monthly deposits required to meet the above expenses, assuming the sale of the West Winona facility, with an explanation for the Board as to how you came up with that figure.

Case Study (answer in 400 words, no text image). Questions at bottom.

Hoosier Manufacturing, Inc. is a producer of household vacuum cleaning robots. Its current line
of cleaning robots are selling excellently. However, in order to cope with the foreseeable
competition with other similar cleaning robots, HM spent $6,000,000 to develop a new line of
smart vacuum cleaning robots that can automatically adjust to all floor types and return to its dock
for Lithium Ion recharging its battery for up to run time of 6 hours. The robot model also has a
built-in camera for easier navigation and thus can detect and avoid stairs and other drop-offs. It
automatically provides more air power on carpets and rugs. Its lower profile cleans under furniture
and bed more efficiently.It has a cleaning path of 4.5” and can clean up to 2,000 sq. ft. per cleaning
job. Its enhanced HEPA-style filter can trap more dirt, dust and allergens and as tiny as 0.8 micron.
It has a tangle-free extractor that can prevent any hair and debris clog. It is a bagless model with
an easy to empty dust cup. Its associated smart phone/tablet application can enable consumers to
set their cleaning schedules with their preferences to clean their places from anywhere. The
company had also spent a further $1,200,000 to study the marketability of this new line of smart
vacuum cleaning robots.
HM is able to produce the new vacuum cleaning robots at a variable cost of $570 each. The total
fixed costs for the operation are expected to be $8,000,000 per year. HM expects to sell 3,200,000
robots, 2,600,000 robots, 1,600,000 robots, 1,200,000 robots and 1,000,000 robots of the new
model per year over the next five years respectively. The new smart vacuum cleaning robots will
be selling at a price of $640 each. To launch this new line of production, HM needs to invest
$32,000,000 in equipment which will be depreciated on a seven-year MACRS schedule. The value
of the used equipment is expected to be worth $4,000,000 as at the end of the 5 year project life.
HM is planning to stop producing the existing vacuum cleaning robots entirely in two years.
Should HM not introduce the new smart vacuum cleaning robots, sales per year of the existing
vacuum cleaning robots will be 1,600,000 robots and 1,250,000 robots for the next two years
respectively. The existing vacuum cleaning robot model can be produced at variable costs of $460
each and total fixed costs of $4,500,000 per year. The existing vacuum cleaning robots are selling
for $550 each. If HM produces the new smart vacuum cleaning robots, sales of existing vacuum
cleaning robots will be eroded by 600,000 robots for next year and 400,000 robots for the year
after next. In addition, to promote sales of the existing vacuum cleaning robots alongside with the
new smart ones, HM has to reduce the price of the existing vacuum cleaning robots to $500 each.
Net working capital for the new smart vacuum cleaning robot project will be 15 percent of sales
and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required.
The first change in NWC is expected to occur in year 1 according to the sales of the year. HM is
currently in the tax bracket of 35 percent and it requires an 18 percent returns on all of its projects.
You have just been hired by HM as a financial consultant to advise them on this new smart vacuum
cleaning robot project. You are expected to provide answers to the following questions to their
management by their next meeting which is scheduled sometime next month.


1. What is/are the sunk cost(s) for this new smart vacuum cleaning robot project? Briefly
explain. You have to tell what sunk cost is and the amount of the total sunk cost(s). In
addition, you have to advise HM on how to handle such cost(s).


2. What are the cash flows of the project for each year?
3. What is the payback period of the project? Should it be accepted if
HM requires a payback of 3 years for all projects?


4. What is the PI (profitability index) of the project?


5. What is the IRR (internal rate of return) of the project?


6. What is the NPV (net present value) of the project?


7. Should the project be accepted based on PI, IRR and NPV? Briefly explain.

Garnett Jackson, the founder and CEO of Tech Tune-Ups, stared t the window as he finished his customary peanut butter and jelly dwich, contemplating the dilemma currently facing his firm. ech Tune-Ups is a start-up firm, offering a wide range of com- ter services to its clients, including online technical assistance, ote maintenance and backup of client computers through the temet, and virus prevention and recovery. The firm has been 'ghly successful in the 2 years since it was founded; its reputation fair pricing and good service is spreading, and Mr. Jackson lieves the firm is in a good position to expand its customer base idly. But he is not sure that the firm has the financing in place to rt that rapid growth. Tech Tune-Ups' main capital investments are its own powerful mputers, and its major operating expense is salary for its consul- ts. To a reasonably good approximation, both of these factors w in proportion to the number of clients the firm serves. Currently, the firm is a privately held corporation. Mr. Jackson his partners, two classmates from his undergraduate days, have tributed $250,000 in equity capital, largely raised from their nts and other family members. The firm has a line of credit a bank that allows it to borrow up to $400,000 at an interest of 8%. So far, the firm has used $200,000 of its credit line. If when the firm reaches its borrowing limit, it will need to raise ity capital and will probably seek funding from a venture capi- firm. The firm is growing rapidly, requiring continual invest- t in additional computers, and Mr. Jackson is concerned that it approaching its borrowing limit faster than anticipated. 525 Mr. Jackson thumbs through past financial statements and esti- mates that each of the firm's computers, costing $10,000, can sup- port revenues of $80,000 per year but that the salary and benefits paid to each consultant using one of the computers is $70,000. Sales revenue in 2011 was $1.2 million, and sales are expected to grow at a 20% annual rate in the next few years. The firm pays taxes at a rate of 35%. Its customers pay their bills with an average delay of 3 months, so accounts receivable at any time are usually around 25% of that year's sales. Mr. Jackson and his co-owners receive minimal formal salary from the firm, instead taking 70% of profits as a "dividend," which accounts for a substantial portion of their personal incomes. The remainder of the profits are reinvested in the firm. If reinvested profits are not suffi- cient to support new purchases of computers, the firm borrows the required additional funds using its line of credit with the bank. Mr. Jackson doesn't think Tech Tune-Ups can raise venture funding until after 2013. He decides to develop a financial plan to determine whether the firm can sustain its growth plans using its line of credit and reinvested earnings until then. If not, he and his partners will have to consider scaling back their hoped-for rate of growth, negotiate with their bankers to increase the line of credit, or consider taking a smaller share of profits out of the firm until further financing can be arranged. Mr. Jackson wiped the last piece of jelly from the keyboard and settled down to work. Can you help Mr. Jackson develop a financial plan? Do you think his growth plan is feasible? Prepare a 700-1,050 word response, plus Excel spreadsheet, for the Mini-case at the end of Chapter 18 in Fundamentals of Corporate Finance (Brealey). Specifically, the Learning Team will need to follow all assumptions in the Mini-case precisely and carefully to complete the following: a. Identify the steps necessary to financially plan and forecast for 2005, 2006, and 2007, b. Project future years using the growth rate assumptions in the Mini-case, c. Determine what type and amount of financing may be required, taking into account the impact on leverage ratios, d. Determine the impact of rising interest rates on future performance, e. Assess alternative capital structures and impact on debt ratio and return on equity. f. Separately, after completing (a) through (e) above, explain how outsourcing certain cost of goods sold items would impact this planning and budgeting process.

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