Because East Coast Yachts is producing at full capacity, Larissa has decided to have Dan examine the feasibility of a new manufacturing plant. This expansion would represent a major capital outlay for the company. A preliminary analysis of the project has been conducted at a cost of $1.2 million. This analysis determined that the new plant will require an immediate outlay of $55 million and an additional outlay of $30 million in one year. The company has received a special tax dispensation that will allow the building and equipment to be depreciated on a 20-year MACRS schedule. Because of the time necessary to build the new plant, no sales will be possible for the next year. Two years from now, the company will have partial-year sales of $18 million. Sales in the following four years will be $27 million, $35 million, $39 million, and $43 million. Because the new plant will be more efficient than East Coast Yachts's current manufacturing facilities, variable costs are expected to be 60 percent of sales, and fixed costs will be $3.5 million per year. The new plant will also require net working capital amounting to 8 percent of sales for the next year. Dan realizes that sales from the new plant will continue into the indefinite future. Because of this, he believes the cash flows after Year 5 will continue to grow at 3 percent indefinitely. The company's tax rate is 21 percent and the required return is 11 percent. Larissa would like Dan to analyze the financial viability of the new plant and calculate the preceding blue cells in order to determine the profitability index, NPV, and IRR. Also, Larissa has instructed Dan to disregard the value of the land that the new plant will require. East Coast Yachts already owns it, and, as a practical matter, it will go unused indefinitely. She has asked Dan to discuss this issue in his report.

Excel File Edit View Insert F Format Tools Data Window Help E 1 7 Q Mon Oct 25 11:57 AM AutoSave OFF A A E ? C ... Chapter 8 Case MBA 661 ~ Q Home Insert Draw Page Layout Formulas Data Review View Tell me Share Comments VA A Custom Conditional Formatting v Arial v 10 = ab v Insert v Ex AP- O. = Format as Table v Ex Delete v $08 =08 Sort & Find & Analyze Paste BIUVV LAV $ ~ % 9 Sensitivity Cell Styles v Format v Filter Select Data G3 X V fx A B D E F G H J K L M N P Q R Chapter 8 Expansion at East Coast Yachts A W Input area: Initial equipment cost 55,000,000 A EA Equipment in 1 year 30,000,000 Year 1 depreciation 3.750% Year 2 depreciation 7.219% Year 3 depreciation 6.677% Year 4 depreciation 6.177% Year 5 depreciation 5.713% 15 Year 2 Year 3 Year 4 Year 5 Year 6 Sales 18,000,000 $ 27,000,000 $ 35,000,000 $ 39,000,000 $ 43,000,000 EA Variable cost 60% Fixed cost EA 3,500,000 NWC percentage of sales 8% Terminal growth rate 3% Tax rate 21% Required return 11.000% 23 24 25 Output area: 26 Provide answers in blue cells 27 28 Depreciation Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 29 Year 0 investment This row reflects depreciation over the five years on the $55M outlay at time= 30 Year 1 investment This row reflects depreciation over the five years on the $30M outlay at time= 31 Total depreciation 32 33 Cases Chapter 8 Case #1 + + 90% Ready 10 ? 25 stv A W BASEBALLExcel File Edit View Insert F Format Tools Data Window Help E 1 7 Q Mon Oct 25 11:58 AM AutoSave OFF A A F ? C ... Chapter 8 Case MBA 661 ~ Home Insert Draw Page Layout Formulas Data Review View Tell me Share Comments Arial v 10 VA A = ab v Custom Conditional Formatting Insert v = Format as Table v x Delete v Paste $ ~ % 9 Sort & Find & Analyze Sensitivity Cell Styles v Format v D Filter Select Data G3 X V fx B D E F G H JK L M N P Q R S Output area: Provide answers in blue cells Depreciation Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 0 investment This row reflects depreciation over the five years on the $55M outlay at time=0. Year 1 investmen This row reflects depreciation over the five years on the $30M outlay at time=1. Total depreciation Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Revenue Taken from row 16 Variable costs 60% of sales Fixed costs Depreciation Taken from row 31 EBT Tax Net income OCF New working capital: Beginning Note how F45 is obtained and proceed to the right to 145 Ending Note how E46 is obtained and proceed to the right to 145 NWC cash flow Note how E47 is obtained and proceed to the right to 146 Year 5 cash flow Value at end of year 5 of perpetual CF S Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Operating cash flow Taken from line 42 Capital spending $ (55,000,000) (30,000,000) Net working capital Taken from line 47 Terminal value Taken from D50 Total cash flows NPV Profitability index IRR Cases Chapter 8 Case #1 + Ready - + 80% 10 ?0 OCT 25 7 4 BASEBALL K