Question

Winnebago Industries, Inc. is considering two alternative capital investment

projects for future expansion: (1) expand production of its motor homes, which

currently sell for $48,000 per unit, or (2) expand production of its luxury motor

coaches, which currently sell for $85,000 per unit. If it invests to expand

production of its motor homes, it expects to increase motor homes annual sales

by 15,000 units at $48,000 each and reduce annual sales of luxury motor

coaches by 550 units, over the next 5 years. If it invests to expand production of

its luxury motor coaches, it expects to increase luxury motor coaches annual

sales by 6,500 units at $85,000 each and reduce annual sales of motor homes by

1,200 units, over the next 5 years. Cost of goods sold and selling, general &

administrative expenses combine for a total of 55% of sales.

Winnebago expects that it would need capital investments in fixed assets of

$800,000,000 for the motor home expansion project, and $600,000,000 for the

luxury motor coach expansion project. Both assets are expected to be

depreciated straight line to zero over the 5 years. Both assets are expected to

have a salvage value of 20,000,000 after 5 years. Both projects require additional

investment in inventory of $14,000,000 and additional accounts payable of

$8,000,000. Winnebago’s corporate tax rate is 34%. Winnebago’s investment

banker estimates its weighted average cost of capital (WACC) at 15%.

Evaluate the two capital investment project alternatives and make your recommendation using:

*****Please show work on EXCEL spreadsheet, please show EXCEL formulas****

1) Net Present Value (NPV)

2 Internal Rate of Return (IRR)

3 Modified Internal Rate of Return (MIRR)

Answer 1

		EVALUATION OF EXPANSION OF MOTOR HOMES
		Initial Cash Flows:
		Fixed Assets	($800,000,000)
		Additional Inventory	($14,000,000)
		AdditionalAccountsPayable	$8,000,000
		Net Initial Cash Flow	($806,000,000)
		Annualcash Flows:
		Increase in Sales Quantity	15,000
		Price per unit	$48,000
		Increase in sales Revenue	$720,000,000
		Decrease in revenue ofluxury coaches	-$46,750,000	(550*85000)
		Net Increase in Revenue	$673,250,000
		Expenses (55%)	-$370,287,500
		AnnualDepreciation	($160,000,000)	(800000000/5)
		Increase in before tax income	$142,962,500
		Increase in after tax income	$94,355,250	(142962500*(1-0.34)
		Add:Depreciation (Non cash expense)	$160,000,000
		AnnualOperating Cash flow	$254,355,250
		Terminal Cash Flow:
		Before Tax Salvage Value	$20,000,000
		After Tax Salvage Value	$13,200,000	(20000000*(1-0.34)
		Release of initial working Capital	$6,000,000	(14000000-8000000)
		Total Terminal cash flow	$19,200,000
		Present Value of Cash Flow=(Cash Flow)/((1+i)^N)
		i=Cost of Capital =15%=0.15
		N=Year of Cash Flow
	N	Year	0	1	2	3	4	5
	A	Initial Cash Flow	($806,000,000)
	B	Annual Operating Cash Flow		$254,355,250	$254,355,250	$254,355,250	$254,355,250	$254,355,250
	C	Terminal Cash Flow						$19,200,000
	D=A+B+C	Net Cash Flow	($806,000,000)	$254,355,250	$254,355,250	$254,355,250	$254,355,250	$273,555,250	SUM
	PV=D/(1.15^N)	Present Value of Cash Flow	($806,000,000)	$221,178,478	$192,329,112	$167,242,706	$145,428,440	$136,005,306	$56,184,041
	NPV=Sum of PV	Net Present Value(NPV)	$56,184,041
		InternalRate of return (IRR)	17.88%	(Using IRR function of excel over net cash flow)					SUM
	FV=D*(1.15^(5-N)	Future Value of Cash flow		$444,868,922	$386,842,541	$336,384,818	$292,508,538	$273,555,250	$1,734,160,068
		806000000*((1+MIRR)^5)=	$1,734,160,068
		(1+MIRR)^5=	2.15
		1+MIRR=	1.16560346
		MIRR=	0.16560346
		MIRR=	16.56%