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Winnebago Industries, Inc. is considering two alternative capital investment projects for future expansion: (1) expand production...

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)

Solutions

Expert Solution

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%

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