LION CORPORATION - Case AA LION Corporation is a growing firm specializing in Lithium-lon Battery technology. It is headquartered in Berea, Ohio. Lion has excellent reputation for the development and improvement of the lithium battery technology. The firm manufactures Lithium-lon batteries for general purpose use in popular sizes like AA, AAA, 9V, C and D etc as well as special purpose ones like laptop batteries, cell phone batteries, iPod/iPhone batteries. The firm is a mid-cap privately held corporation and is a dominant player with significant market share in the Lithium-lon Battery Market and competes favorably with large cap multinational corporations like Sony, Energizer, and Duracell. Its customers are users of batteries like Toshiba, Dell, Apple and other computer manufacturers as well as retail giants like Best Buy, Costco, Wal-Mart, etc. Recent trends show a significant growth potential in the Lion battery market and the consumer's affinity to the LION brand. In a recent review, the Consumer Reports magazine gave big thumbs up and rated the Lion product as the best battery in the market when quality is considered in conjunction with price defining value to the consumer. The magazine rated the batteries the "best buy" in every size. Naturally, the management is very pleased with the news having been rated ahead of elite brands like Sony, Duracell and Energizer. Gomer Pyle is the Chief Operating Officer of Lion Corporation. He reports to Vice Carter, the company president. Lucy McGillicutty is the Chief Financial Officer, and Archie Bunker is the Senior Vice President of Marketing. They both report to the president, Vince Carter. Vince has requested information relevant for the expansion of the plants to meet increased demand for their products. The three executives have put together the following information in their presentation to Vince. Product - AA batteries a. The batteries are sold wholesale in boxes. It is available in two packages - Box containing fifty 4pack blister packets, and Box containing fifty 2-pack blister packets. b. Sale price of the batteries: $275.00 for a box of fifty 4-pack blister packets and $175 for a box of fifty 2-pack blister packet. The 4-pack has four batteries and the 2-pack has two batteries in each pack. c. Variable cost: $100/ box of fifty 4-pack blister packets and $65/ box of fifty 2-pack blister packet. d. Fixed Expenses for the operations are expected to run at $7 million per year. e. Expected incremental worldwide unit sales: 4-pack boxes in thousands for years 1 thru 8:149,151,156,156,155,155,155 and 155. 2-pack boxes in thousands for years 1 thru 8:61,83,83,88,88,88,88 and 88. e. Lion currently produces other types of batteries in size AA - Alkaline, Nickel-Metal Hydride (NiMH), and Nickel Cadmium (NiCad). The current combined sales of these three types of batteries for size AA is expected to be $150 million in the first year and expected to be declining at 7% per year. The introduction of Li-ion batteries will result in negligible reduction of sales of the other current AA batteries, implying no erosion effects. f. New Equipment Purchase: The equipment is purchased in 3 phases. Phase 1: Purchase cost =$40 million. Purchased at the project beginning, at time zero. It is depreciated using MACRS method for 7 years. Phase 2: Purchase cost =$14 million. Purchased at the end of year 1 . Depreciation begins in 2nd year. It is depreciated using MACRS method for 5 years. Phase 3: Purchase cost =$28 million. Purchased at the end of 2nd year. Depreciation begins in 3rd year. It is depreciated using straight line method for 7 years. g. Net working capital requirements: The net working capital for this project is expected to be 17% of sales and is expected to occur at the beginning of the year. h. Tax rates: The incremental marginal corporate income tax rates: Fed =28%, State ( Ohio) =7.52%, Berea =2% Capital Gains (Loss) Tax Rate =20% i. Minimum acceptable rate of return (MAAR): Lion Corporation's before tax MARR is 21% j. Project life and terminal Values The expected life of the project is 8 years. At the end of that life, the equipment is expected to be sold for $14 million. Your group has been hired by Vince Carter. You will write a one-page summary report answering the following questions. A summary paragraph should contain your recommendation and include a succinct rationale supporting your recommendation. You must attach the spread sheets - so your presentation should have three attachments and the one-page summary. 1. What is the NPV? 2. What is the IRR? 3. What is the Discounted Payback? 4. What is Profitability Index? 5. Should Lion build the new plant
