HELLO I WANT TO KNOW THE SOURCE (BOOK) WHERE THIS EXERCISE WAS TAKEN FROM. THE SOLUTION IS NOT REQUIRED. THANK YOU.

Richard Pitkin , Chief Financial Officer of Draper corporation, was concerned by the long-term prospects for the Synectics product line. The product line had performed well historically , but the impending loss of its patent position seemed certain to attract new entrants and result in lower product prices and flat unit sales through the year 2004. Table 1 - Sales forecast 1998 1999 2000 2001 2002 2003 2004 2005 Units 1,000 1,000 1,000 1,000 1,000 1,000 1,000 0 Unit price $20.00 $20.60 $21.00 $21.15 $21.25 $21.25 $21.00 $19.00 Profitability of the Synectics product line was forecast at $ 1,166,000 in 1998. However margins seemed likely to narrow as cash cost of goods sold and selling, general and administrative expense increased with inflation at 3% per year. 1998 Beyond 1998 Sales $20,000,000 See Table 1 cash cost of goods 10,000,000 + 3% per year Depreciation 1,057,000 see table 2 Gross profit 8,943,000 Sell,General and Admin. 7,000,000 + 3% per year EBIT 1,943,000 Tax @ 40% 777,000 EBIAT 1,166,000 Pitkin believed that the existing manufacturing and warehousing capacity was sufficient to meet demand over the next seven years. However, some capital expeditures would be necessary as equipment wore out. Table 2 - Capital Expeditures and Depreciation 1998 1999 2000 2001 2002 2003 2004 Capex $400 $400 $400 $400 $300 $200 0 Depreciation 1,057 1,124 1,204 1,304 1,404 1,504 1,504 Additional, albeit small, investment in spontaneous working capital would also be required. Accounts receivable were expected to remain at 16% of sales. And inventory, accounts payable and accrued expenses were forecast at 20%, 8%, and 7% of cost of goods, respectively. All of the working capital would be recovered in 2005 when the product line was discontinued. Table 3 - Spontaneous Working Capital 1998 1999 2000 2001 2002 2003 2004 2005 Working Capital 3,700 3,811 3,890 3,930 3,963 3,980 3,957 0 (investment in) (108) (111) (79) (40) (33) (17) 23 3,957 recovery of working capital Management was considering the elimination of the product line as of year-end 1997. It seemed likely that the working capital of $3,592,000 could be recovered in its entirety and that the fixed assets with a book value of $7 million could be sold for $3 million. The loss of $4 million on disposition of the fixed assets would be tax deductible. However, Draper Corporation was comfortably within its policy that debt be in the range of 30-35% of total capital, and management felt no pressing need for cash. Would you recommend that the Synectics product line discontinued at the beginning of 1998? Please use 12% as the appropriate discount rate and assume that the salvage value of the equipment will be $0 in 2005.