A B D E F G I o 1 Fact Sheet 2 3 Walsingham Corp. Inc is a technology firm, one of whose products is nearing the end of its life cycle. 4 The firm is considering whether or not to make the investment necessary to extend the product's 5 life. The required investment is estimated at $175 million, which would allow the company to 6 upgrade both the product and the production process and enable it to regain declining market share. 7 The investment would be complete in the fourth quarter of 2021, and the new production process 8 would roll out in January 2022. 9 LO The marketing department has provided the following sales projections: 11 12 Units sold Units sold 13 p.a. if R&D p.a. if R&D 14 investment investment 15 Year is made is not made 16 17 2022 125,000 100,000 18 2023 150,000 100,000 2024 175,000 90,000 20 2025 200,000 80,000 21 2026 100,000 70,000 22 23 The 2026 unit sales volumes are expected to continue into the indefinite future. The current unit sale 24 price of $400 would remain unchanged. However the upgraded manufacturing process would 25 be more efficient, resulting in an altered cost structure as follows: 26 27 Cost category Current Process New Process 28 29 Direct costs 60% revenue 40% revenue 30 Indirect costs 30% revenue 20% revenue 31 32 The subsidiary making the product was established for this sole purpose in early 2016 with an initial 33 $100 million investment. Beginning in 2016, this investment has been depreciated for tax 34 purposes using the MACRS ten-year asset schedule. The proposed new $175 million investment 35 would be assigned to the MACRS seven-year asset category, with tax depreciation 36 commencing when the new process became operational in 2022. 37 88 The firm's target debt equity ratio is 1.5 based upon market values. Most of its long-term debt is 39 in the form of $1,000 par value 5% coupon bonds with an average remaining maturity of 6 years. 10 The bonds are currently trading at about 106% of par value. The 2021 common dividend was $10 11 per share, which has grown by about 3% p.a. over the past 7 years. The stock is trading at $80 a share. 22 The company's effective tax rate is about 30%. 13 14 Assignment: Prepare a presentation for your direct superior evaluating this proposal. 15 A B D E F G I o 1 Fact Sheet 2 3 Walsingham Corp. Inc is a technology firm, one of whose products is nearing the end of its life cycle. 4 The firm is considering whether or not to make the investment necessary to extend the product's 5 life. The required investment is estimated at $175 million, which would allow the company to 6 upgrade both the product and the production process and enable it to regain declining market share. 7 The investment would be complete in the fourth quarter of 2021, and the new production process 8 would roll out in January 2022. 9 LO The marketing department has provided the following sales projections: 11 12 Units sold Units sold 13 p.a. if R&D p.a. if R&D 14 investment investment 15 Year is made is not made 16 17 2022 125,000 100,000 18 2023 150,000 100,000 2024 175,000 90,000 20 2025 200,000 80,000 21 2026 100,000 70,000 22 23 The 2026 unit sales volumes are expected to continue into the indefinite future. The current unit sale 24 price of $400 would remain unchanged. However the upgraded manufacturing process would 25 be more efficient, resulting in an altered cost structure as follows: 26 27 Cost category Current Process New Process 28 29 Direct costs 60% revenue 40% revenue 30 Indirect costs 30% revenue 20% revenue 31 32 The subsidiary making the product was established for this sole purpose in early 2016 with an initial 33 $100 million investment. Beginning in 2016, this investment has been depreciated for tax 34 purposes using the MACRS ten-year asset schedule. The proposed new $175 million investment 35 would be assigned to the MACRS seven-year asset category, with tax depreciation 36 commencing when the new process became operational in 2022. 37 88 The firm's target debt equity ratio is 1.5 based upon market values. Most of its long-term debt is 39 in the form of $1,000 par value 5% coupon bonds with an average remaining maturity of 6 years. 10 The bonds are currently trading at about 106% of par value. The 2021 common dividend was $10 11 per share, which has grown by about 3% p.a. over the past 7 years. The stock is trading at $80 a share. 22 The company's effective tax rate is about 30%. 13 14 Assignment: Prepare a presentation for your direct superior evaluating this proposal. 15