9 Decision To Be Made 10 11 12 13 14 Investment size, valuation, sensitivity analysis, what-if capabilities, Excel Data Table, cost structure, capital structure 15 16 You are Executive Vice President of Operations of a company that produces and distributes household goods. 17 Your company manufactures some of its products and purchases and resells other products. 18 Your company has been distributing brushes purchased from a third-party and you are analyzing the economics of insourcing (manufacturing internally) the supply. 19 These are the facts that you need to incorporate into a model: 20 Your company has been spending $200,000 annually to purchase brushes. This expense will cease if supply of brushes is insourced. 21 You estimate that manufacturing inhouse will cost $100,000 in labor and $10,000 in overhead. 22 23 24 25 26 27 28 29 30 31 32 Whether to continue purchase brushes to be distributed or to begin manufacturing them internally? How big an investment can you make for insourcing to be attractive? How should you finance the investment. Strategic Considerations & KPIs A significant investment in equipment will be required and the investment will be straight-line depreciated over a 5 year useful life (no residual value). Additional work needs to be done to firm up an estimate but you believe the equipment will cost between $200,000 and $350,000. The Treasurer of your company needs to decide how the investment would be financed and has asked you to analyze the sensitivity of the return to financing options. At the end of the previous year, 2022, your company had $200,000 in Cash, zero debt, and $100,000 in Equity on its Balance Sheet. For the purpose of developing the model, you have selected some initial values for the two independent variables. Investment Required Percent Debt Financed 300,000 50% sponsible for developing a model that analyzes the potential investment, providing valuations of alternate strategies and a sensitivity analysis of the results. 32 33 34 35 36 37 38 Income Statement 39 40 41 42 43 44 C B D A F G H I J You are responsible for developing a model that analyzes the potential investment, providing valuations of alternate strategies and a sensitivity analysis of the results. The following model should include only the incremental impact on the Income Statement, Balance Sheet and Cash Flow Statement. Please enter formula in the yellow boxes below to develop the model. 53 54 55 56 57 58 59 60 61 62 63 Finished Goods Expense Depreciation Labor Overhead EBIT Interest Income (5% interest rate) Pretax Tax (30%tax rate) Net Income 45 46 47 48 49 Balance Sheet (change in account) 50 Cash 51 PP&E 52 Debt Equity Cash Flow Sta ement Net Income Depreciation Cash Flow from Operations CapEx Cash Flow from Investing Issues (Retirement) Debt Cash Flow from Financing || Generated 2022 200,000 0 0 100,000 EXCEL Financial Functions 0 (Current) 2023 50,000 300,000 150,000 100,000 (300,000) (300,000) 150,000 150,000 (150,000) E 1 2024 420,000 (60,000) (210,000) (10,000) 140,000 140,000 42,000 98,000 0 DATA TABLES 2 2025 420,000 (60,000) (210,000) (10,000) 140,000 140,000 42,000 98,000 0 3 2026 420,000 (60,000) (210,000) (10,000) 140,000 140,000 42,000 98,000 0 4 2027 420,000 (60,000) (210,000) (10,000) 140,000 140,000 42,000 98,000 0 MODEL Simple Company 5 2028 420,000 (60,000) (210,000) (10,000) 140,000 140,000 42,000 98,000 0 Hints K L M Shown as positive because it is an expense that will cease to exist N Net Income from the Income Statement Investment Required spread of the useful life (5 years) MODEL Marketing Stratagy O Interest Income is based on a 5% interest rate applied to prior year Net Cash (Cash minus Debt) P Cash is equal to that of the previous year plus Cash Generated PP&E is equal to that of the previous year minus Depreciation plus CapEx. (However, CapEx is shown as a negative on the Debt is equal to that of the previous year plus Issues (Retirement) of Debt Equity is equal to that of the previous year plus Net Income (there are no Dividends) Q MODEL Make-Buy Decision || Debt based on Percent Debt Financed with 1/5th retired each year. Must be a formula based on D52 enabling changed a 57 58 59 60 A Depreciation 87 88 Cash Flow from Operations CapEx B Cash Flow from Investing Issues (Retirement) Debt Cash Flow from Financing Cash Generated C 82 83 84 85 86 Which would generate the higher NPV? Investment Required D 61 62 63 64 65 Write a fomula that calculates the Net Present Value (NPV) of the cash flows in Row 63 using a 10% discount factor. 66 67 68 (300,000) (300,000) 150,000 150,000 (150,000) 200,000 250,000 300,000 350,000 EXCEL Financial Functions E 0 0% F 0 Change the 'Investment Required', cell D28, to $200,000 and enter the resulting NPV value (not the formula) in the yellow box below. G DATA TABLES 0 Percent Debt Financed 25% 50% 69 70 71 Keeping the $200,000 'Investment Required' change the 'Percent Debt Financed' to 0% and enter the resulting NPV value (not the formula) in the yellow box below. 72 73 74 Below we present a Excel Data Table. 75 The Excel Data Table functionality permits users to identify a set of potential value for two independent variables. 76 The functionality automatically analyzes a formula that is dependent on these two variables and presents the results of all combinations of the two independent variables. The 'EXCEL Financial Functions' Sheet presents how to create a Data Table, but, the output is presented here for those that do not want to dive any deeper. 77 78 79 80 81 H 0 75% 100% I MODEL Simple Company 0 J K L M Investment Required spread of the useful life (5 years) N MODEL Marketing Stratagy O Debt based on Percent Debt Financed with 1/5th retired each year. Must be a formula based on D52 enabling changed a P MODEL Make-Buy Decision