Question

1. What are the relevant cash flows that should be used to analyze this project?

2. Please calculate OCF, NCS, and change in NWC

3. Based on the forecast of the cash flows, could you calculate the net present value, internal rate of return, profitability index, payback period, discounted payback period of the project?

Superman Sports Company The CEO of Superman Sports Company, Russell Warren, was a mechanical engineer. He developed a sound technique of making baseball bats and founded the company. Under his leadership, the company had gained national reputation. Recently, however, a new machine was developed in the industry which would allow manufacturers to coat the aluminum baseball bats with a special compound giving them a satin finish and making them more durable and powerful. The prototype has been presented to the respective regulatory authorities and has been approved. Julian Jackson, the head of the design group, has tested the new product and researched the relevant cost and production process issues that would entail. Julian reported that besides the initial price tag of $350,000 for one of these machines, users would have to incur shipping, handling, and installation costs of $4,500 and annual fixed operating costs of about $20,000 per machine. Currently, the company incurs fixed operating costs of $28,000 for its coating and finishing process. Initial marketing survey results indicated that the company would be able to increase sales of its newly designed baYball bats by about 10% per year in the first year of introduction and thereafter at a rate of 5% per yer compared with forecasted sales growth of 3% per year for the current type of baseball bats. During the most recent year, the Company sold 220,000 baseball bats at an average price of $12.50 per unit. The newly designed bat was expected to sell for $13 per unit. Material, labor, general,and administrative costs were expected to remain constant at $10 per unit. The increased sales and production requirements would entail an increase in accounts receivable of $54,000 an increase in accounts payable of $30,000, and an increase in inventory of $20,000. It was assumed that any increase in net working capital would be recovered at the end of the useful life of the machine, which was estimated to be 5 years. The existing machine was purchased 5 years ago for $225,000. Currently, it could be sold for $100,000, with the price expected to decline to about $10,000 after 5 more years of use. Depreciation on the existing machine was being calculated using a 10- year straight-line schedule with the assumption of no residual salvage value. The new machine was expected to last for 5 years -the same as the remaining life of the old machine. The new machine would qualify as a 5-year class life asset under MACRS depreciation rates and was expected to have a market value of approximately $20,000 at the end of its economic life. The Company's marginal tax rate is 22% and its weighted average costs of capital (required rate of return) is estimated at 15%. Part of the cost of replacing the existing machine would be financed by a bank loan that would require an annual interest expense of 10% on the outstanding balance. The MACRS depreciation schedules are given below Property Class Five-Year Seven-Year 14.29% 24.49 17.49 12.49 8.93 8.92 Year Three-Year 44.45 14.61 7.41 20.00% 32.00 19.20 11.52 11.52 5.76 446 To assist Russell Warren making the decision whether or not to go with the new technology, please prepare a capital budgeting report and address the following questions

Answer 1

Cash Flow workings if we continue to existing business strategy:

Asset value :

Asset Value	225000
Depreciated Till the date	112500
Ope Balance Value	112500
Revlued asset	100000
Impairment loss	12500
Residual Value	10000
Depreciable Value	90000

  Operation performance

	Sales			Direct Epenses			Fixed operating cost	Depreciation cost	Depreciation Rate	Tax Cost	Tax Rate	PAT
Y1	2,26,600	12.5	28,32,500	2,26,600	10	2266000	28000	30500	20%	1,11,760	22%	3,96,240
Y2	2,33,398	12.5	29,17,475	2,33,398	10	2333980	28000	18000	20%	1,18,249	22%	4,19,246
Y3	2,40,400	12.5	30,04,999	2,40,400	10	2403999.4	28000	18000	20%	1,22,100	22%	4,32,900
Y4	2,47,612	12.5	30,95,149	2,47,612	10	2476119.382	28000	18000	20%	1,26,067	22%	4,46,963
Y5	2,55,040	12.5	31,98,004	2,55,040	10	2550402.963	28000	18000	20%	1,32,352	22%	4,69,249

New strategy cash flows workings :

New Asset value

Asset Value	354500
Residual Value	20000
depreciable Value	334500
Sale of existing asset	100000

Operation Cash Flows:

	Sales			Direct Epenses			Fixed operating cost	Depreciation cost	Depreciation Rate	Tax Cost	Tax Rate	PAT
Y1	2,42,000	13	32,46,000	2,42,000	10	2420000	20000	66900	20%	1,62,602	22%	5,76,498
Y2	2,54,100	13	33,03,300	2,54,100	10	2541000	20000	107040	32%	1,39,757	22%	4,95,503
Y3	2,66,805	13	34,68,465	2,66,805	10	2668050	20000	64224	19%	1,57,562	22%	5,58,629
Y4	2,80,145	13	36,41,888	2,80,145	10	2801453	20000	38534.4	12%	1,72,018	22%	6,09,883
Y5	2,94,153	13	38,43,983	2,94,153	10	2941525	20000	38534.4	12%	1,85,663	22%	6,58,260

2&3 :

Description	Y1	Y2	Y3	Y4	Y5
PAT	5,76,498	4,95,503	5,58,629	6,09,883	6,58,260
Add Depreciation	66,900	1,07,040	64,224	38,534	38,534
Operation Cash Flows ( OCF)	6,43,398	6,02,543	6,22,853	6,48,417	6,96,794
Less: Increase in accounts receivables	-54,000	-54,000	-54,000	-54,000	-54,000
Less: Increase in Inventory	-20,000	-20,000	-20,000	-20,000	-20,000
Add : Increase in Accounts payables	30,000	30,000	30,000	30,000	30,000
Net Working Capital (NWC)	-44,000	-44,000	-44,000	-44,000	-44,000
Asset Purchase	-3,34,500
Net Cash savings (NCS)	2,64,898	5,58,543	5,78,853	6,04,417	6,52,794
NPV @ 15 %	2,30,346	4,22,339	3,80,605	3,45,578	3,24,554	17,03,422
IRR	No IRR , Because the Initial year NCS is Positive
Pay Back Period	1	Years

Sale Value and residual value is consider respective year of sale and discard.