Do it on excel or table.

shows nationwide and received raving 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 Lazy Mower, the design team had to present a

detailed feasibility study to the Capital Investment Committee, which

was chaired by the Vice President of Finance, Gary Lester. As was

typical in a major undertaking of this type, the proposal had to include

detailed cost and revenue estimates with sufficient documentation to

substantiate the numbers.

Having been involved with more than a few of these kinds of

proposals before, the head of the Design team, Dave Crotte, knew that he

had better take every possible factor into consideration and be prepared

for a tough and demanding question and answer session at the next

committee meeting. Luckily for Dave, his assistant, Richard Snow, who

had recently earned his Chartered Financial Analyst $($CFA$)$ designation,

was an experienced and dependable employee. Prior to being hired by

CPC three years ago, Rick had worked for another large engineering

company for over $10$ years. "Richard, we have to dot all the $"$i$\text{'}$s$"$ and

cross all the $"$t$\text{'}$s$"$ on this one!" said Dave. $"$Or else, the big guys are going

to tear us apart, coz we're talking major dollars here. Their main question

is going to be$,$ IS IT REALLY WORTH IT$?".$

So Dave and Rick began collecting the necessary information.

They knew that to have a comprehensive feasibility study they would

have to include the following:

Pro Forma statements showing expected annual.

revenues, variable costs, fixed costs, and net cash flows

over the economic life of the project with appropriate

supporting documentation;

Break$-$Even Analysis;

Sensitivity of the cash flows to alternative scenarios of

sales growth and profit margins;

Based on the data provided by the Marketing department, they prepared

Table $1,$ showing the expected unit sales of the Lazy Mower over its

$10-$year economic life and the expected selling price per unit. Note that

the price of $$700$ per unit was estimated to gradually drop to $$600$ per

unit over the $10-$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, including shipping, handling,

and installation, was estimated at $$30$ million. It was estimated that

after $10$ years, the equipment and tools could be sold for $$3$ million.

The manufacturing would be done in an unused plant of the

firm. Similar plant locations could be leased for $$10,000$ per month.

Fixed costs were estimated to be $$2,000,000$ per year while variable

production costs per unit were expected to be $$400.$ To get the project

underway, additional inventory of $$500,000$ would be required. The

company would increase its accounts payable by$.$ $$700,000$ and its

accounts receivable by $$1,000,000.$

The weighted average cost of capital was calculated to be $18\%.$

c $400,000$ peryerum The company's tax rate was $34\%.$

Table $1$

Projected Unit Sales and Price for Lazy Mower Case $10$ The Lazy Mower: Is It Really Worth It$?$

Table $2$

Modified ACRS Depreciation Allowances