Based on the data provided by the Marketing department, they prepared Table 1, showing the expected unit sales of the Lazy Mower over its 9-year economic life and the expected selling price per unit. Note that the price of the $2,000 per unit was estimated to gradually drop to $1,500 per unit over the 9-year period reflecting competitive pressures. Depreciation for this project was based on the 7-year MACRS rates as shown in Table 2. The cost of equipment, Dr. Pavel Jeutang FIN 413/513 Fall 2019 Project I Project ID: 4.6_3 including shipping, handling, and installation, was estimated at $125 million. It was estimated that after 9 years, the equipment and tools could be sold for $2 million. The manufacturing would be done in an unused plant for the firm. Similar plant locations could be leased for $11,000 per month. Fixed costs were estimated to be $5,000,000 per year while variable production costs per unit were expected to be $1,300. To get the project underway, additional inventory of $1,000,000 would be required. The company would increase its accounts payable by $1,500,000 and its accounts receivable by $700,000. Dave and Rock estimated that each year there after, the net working capital of the firm would amount to 7% of sales. In the final year of the project, networking capital will decline to zero as the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the projects life. The weighted average cost of capital was calculated to be 12%. Interest expenses on debt raised to fund the project were estimated to be $500,000 per year. The companys tax rate was 34%.

1. Prepare a Pro Forma Statement showing the annual cash flows resulting from the Lazy Mower project. 2. Based on your annual Cash flow estimates, calculate the following for the project: IRR(s) NPV Profitability Index

Table 1 Projected unit Sales and Price for Lazy Mower Year 1 2 Unit Sales 50,000 1 60,000 72,000 70,000 65,000 65,000 63,750 62,500 61,250 Unit Price $2,000 $2,000 $2,000 $1,700 $1,700 $1,700 $1,500 $1,500 $1,500 7 Table 2 Modified ACRS Deprecation Allowances Year 2 3 3-Year 0.3333 0.4445 0.1481 0.0741 5-Year 0.2000 0.3200 0.1920 0.1152 0.1152 0.0576 7-Year 0.1429 0.2449 0.1749 0.1249 0.0893 0.0893 0.0893 0.0446 10 - Year 0.1000 0.1800 0.1440 0.1152 0.0922 0.0737 0.0655 0.0655 0.0656 0.0655 0.0328 7 8 10 11 | Table 1 Projected unit Sales and Price for Lazy Mower Year 1 2 Unit Sales 50,000 1 60,000 72,000 70,000 65,000 65,000 63,750 62,500 61,250 Unit Price $2,000 $2,000 $2,000 $1,700 $1,700 $1,700 $1,500 $1,500 $1,500 7 Table 2 Modified ACRS Deprecation Allowances Year 2 3 3-Year 0.3333 0.4445 0.1481 0.0741 5-Year 0.2000 0.3200 0.1920 0.1152 0.1152 0.0576 7-Year 0.1429 0.2449 0.1749 0.1249 0.0893 0.0893 0.0893 0.0446 10 - Year 0.1000 0.1800 0.1440 0.1152 0.0922 0.0737 0.0655 0.0655 0.0656 0.0655 0.0328 7 8 10 11 |