Case Study Questions

•  prepare a pro-forma income statement showing the annual cash flows resulting from the Lawn Robot project.

• Estimate the cash flows and calculate NPV and profitability ratios of the project? What do you recommend?

• Calculate the IRR of the project. Based on your calculations, what would you recommend? Why?

• Calculate the payback period and discounted payback period. If the company’s expected payback period is 3 years, what do you recommend? Why?

• What could the maximum value of cost of capital that makes the company still to accept the project?

• How should the annual interest expense of $400,000 be treated? Explain.

• How sensitive is the net present value of the project to the cost of capital? Give different value for the cost of capital between 5%-70% and calculate NPV for each values? You can show your findings with a graph where cost of capital on the x axis and NPV on the y axis.

• Suppose that the company spent $500,000 in developing the prototype of the Lawn Robot. How should they treat this item in their report? Explain.

• Use a scenario analysis to show how the NPV would change if the sales forecasts were 15% worse (pessimistic) and 15% better (optimistic) than the stated forecasts(base).

input data "

Projected Unit Sales and Price for Lawn Robot
Year	Unit Sales	Unit Price
1	30,000	$1,000
2	34,000	1000
3	38,800	1000
4	38,000	950
5	36,000	950
6	36,000	950
7	35,500	950
8	35,000	900
9	34,500	900
10	34,000	900

Modified ACRS Depreciation Allowances
Year	3-Year	5-Year	7-Year
1	33.33%	20.00%	14.29%
2	44.44	32	24.49
3	14.82	19.2	17.49
4	7.41	11.52	12.49
5		11.52	8.93
6		5.76	8.93
7			8.93
8			4.45

The Lawn Robot: Is It Really Worth It? If there was one thing the folks at Creative Products Corporation (CPC) knew well, it was how to come up with useful and unique products in the midst of economic adversity. With current year revenues considerably lower and profit margins shrinking due to severe price competition, the firm's engineers had been pushed hard to develop a prototype of a useful, and hopefully highly profitable, "unique" product. Last month, the design team unveiled a fully tested, prototype of their latest innovation, a remote- controlled lawn mower, the "Lawn Robot." Surveys of retailers and customers conducted by the marketing depart- ment indicated that demand would be excellent, provided the price was lower than a riding lawn mower. The testing and development phases took almost three years and the final product passed all safety hazard tests with flying colors. After the unveiling, the product was exhibited at various home shows nationwide and received rave reviews. Full production had not yet started, however, because there had been a change in CEOs, and the new CEO was highly conservative. Before being given the "go ahead" to go into full-scale production of the Lawn Robot, the design team had to present a detailed feasibility study to the Capital Investment Committee (CIC), which was chaired by the Vice President of Finance, Bill Burton. As was typical in a major under- taking of this type, the proposal had to include detailed cast and revenue estimates with sufficient documentation to substantiate the numbers.