-According to our calculations, which option appears to be the best choice - producing canvas for the Navy or selling the land? Why?

-However, what estimate might Mr. Tar want to reconsider??? (Hint: if the inflation rate is 4%, what might the lands market value actually be five years from now?

-If Mr. Tar reconsiders the value of the land in five years, should Industrial Fabrics, Inc. accept the offer from the Navy or accept the offer to sell the land now?

From medieva to American m Chapter 9 Mini Case Jack Tar, CFO of Industrial Fabrics, Inc,opened the internal company confidential envelope. It from the CEO asked Mr. Tar to review the bid before it was submitted contained a draft of a competitive bid for a contract to supply duffel canvas to the U.S. Navy. The cover memo The bid had been prepared by the sales staff. It called for Industrial Fabrics to supply 100,000 yards o The costs involved in producing the canvas would include a fixed cost of $300,000 per year plus varia duffel canvas per year for five years. The proposed selling price was fixed at $30 per yard. ble costs of $18 per yard. Variable costs are expected to increase at the inflation rate of 4% per year Mr. Tar was not usually involved in sales, but this bid was accepted pro unusual in at least two respects. First, if by the Navy, it would commit Industrial Fabrics to a fixed-price, long-term contract. Second, ducing the duffel canvas would require an investment of $1.5 million to purchase machinery and to refurbish the company's plant in Maine. Mr. Tar set to work and, by the end of the week, had collected the following facts and assumptions: The plant in Maine had been built in the early 1900s and is now idle. The plant was fully depreciated on the books, except for the purchase cost of the land of $10,000. Now that the land was valuable shorefront property, Mr. Tar thought the land and the idle plant could be sold, immediately or in the near future, for $600,000. Refurbishing the plant would cost $500,000. This investment would be depreciated for tax purposes using the 10 year straight line method. ($50,000 per year) The new machinery would cost $1 million. This investment could be depreciated using the 5 year straight line method. ($200,000 per year) . The refurbished plant and new machinery would last for many years. However, the remaining market for duffel canvas was small, and it was not clear that additional orders could be obtained once the Navy contract was finished. The machinery was custom-built and could be used only for duffel canvas. Its secondhand value at the end of 5 years was probably zero. Mr. Tar thought that working capital would average about 10% of sales of revenue. This would result in an increase in working capital (which is a decrease in cash flow) in the first year and a decrease in working capital (which is an increase in cash flow) in year 5. Armed with this information, Mr. Tar would like for you to assist him in constructing a spreadsheet to calculate the NPV of the duffel canvas project, assuming th at the bid would be accepted by the Navy. r. Tar had finished compiling the necessary information, an envelope arrived from the CEO. It a firm offer from a real estate developer in Maine to purchase the land and plant for $1.5 million in cash. uld Mr. Tar recommend submitting the bid to the Navy at the proposed price of $30 per yard? The Sho discount rate for this project (opportunity cost of capital) is 12%