Question

AGOURA MANUFACTURING MINI-CASE

Agoura Manufacturing has announced the introduction of a new product. They forecast product- specific sales demand to last five years. Then because this product is somewhat of a fad, they will terminate the project. Manufacturing of the product will require the acquisition of an existing facility and purchase and installation of some new equipment. The following information describes the new project:

Capital Investment requirement:

Cost of new plant and equipment:      $13,750,000 Shipping and installation costs:                          $   465,000

Working Capital requirements:

An initial working-capital requirement of $350,000 will accompany the start of production. After that, total investment in net working capital during each year will be equal to 16 percent of the dollar value of sales for that year. Therefore, the working capital investment required will increase during years 1 through 3, decrease in year 4, and finally, all working capital is converted to cash at the termination of the project at the end of year 5.

Sales Forecast:

Year	Units Sold
1	75,000
2	115,000
3	195,000
4	75,000
5	45,000

Sales price per unit: $275/unit in years 1–4, $180/unit in year 5 Variable cost per unit: $215/unit

Annual fixed costs: $675,000

Other Assumptions:

Agoura Manufacturing uses the simplified straight-line depreciation method over useful life. The plant and equipment will have no salvage value after five years. Agoura Manufacturing pays taxes at a 34% marginal rate. Their cost of capital is 17%, and this project offers a similar risk profile to the company’s overall operations.

1. Include a cash flow diagram for this project?

Answer 1

	PARTICULARS	$
	COST OF THE PLANT	13,750,000
	Shipping and installation	465,000
		14,215,000
	LIFE	5 YEAR
	DEPRECIATION	14215000/5	2843000
	working-capital requirement of	350,000
			YEAR
	PARTICULARS		1	2	3	4	5	TOTAL
	SALES		75000	115000	195000	75000	45000
	PRICE		275	275	275	275	180
	SALES VALUE		20625000	31625000	53625000	20625000	8100000
	VC		215	215	215	215	215
	CONTRIBUTION		60	60	60	60	-35
	TOTAL CONTRIBUTION		4500000	6900000	11700000	4500000	-1575000
	FIXED COST		675000	675000	675000	675000	675000
	DEPRECIATION		2843000	2843000	2843000	2843000	2843000
	EARNINGS BEFORE TAX		982000	3382000	8182000	982000	-5093000
	TAX 34%		333880	1149880	2781880	333880	-1731620
	EARNINGS AFTER TAX		648120	2232120	5400120	648120	-3361380
	ADD DEPRECIATION		2843000	2843000	2843000	2843000	2843000
	CASH FLOW		3491120	5075120	8243120	3491120	-518380
	PV FACTOR	17%	0.855	0.731	0.624	0.534	0.456
	PV OF CASH FLOW		2984908	3709912.72	5143707	1864258	-236381	13466404
	LESS WORKING CAPITAL		350000	5060000	8580000	3300000	1296000	18586000	16% OF SALES
LESS	PV OF WORKING CAPITAL		350000	3698860	5353920	1762200	590976	11755956
ADD	RELEASE OF OF WORKING CAPITAL IN YEAR 5							8475216
	NPV							10185664
	NOTE	THE WORKINGS SHOWS A POSITIVE NPV THE PROJECT SHOULD BE ACCEPTABLE