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:

a. Net Present Value (NPV)

b. Internal Rate of Return (IRR)

c. Modified Internal Rate of Return (MIRR)

Answer 1