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 14, $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 companys overall operations.

Questions:

1. With respect to the decision to buy, which is more important for Agoura to consider, accounting profits earned or project free cash flows?