ITW INC.CAPITAL PROJECTANALYSISFIN 3504 CASE ASSIGNMENT FALL 20202| P a g eCompany BackgroundITWInc.(the Company) is a global packaging and material handling equipment company with manufacturing, sales and service facilities throughout North America, Europe,and Asia.It isdevelopinga new packaging machine(ITW1000)that will replace industry legacy packaging machinery andtargetscompanies in the food and beveragesector. The ITW1000 willstreamlinethe packaging function of customeroperationswhich will reduce costsand increase production efficiency.Company management has estimated that the overall market for ITW1000could beabout 10,000 units.Management research indicates that competitors are also developingsimilar types of machines.ITW1000The ITW1000 is a high-speed sorting, labeling, packing and material handling machine.It maximizes theaccuracy of the packaging and labeling operation.Its key features consist of:Easily adaptable to various food and beverage manufacturers product packaging designsConstructed of light weight and durable components which make it easy to movelocations within a production facilityArobotic system that is builtfor high-speed operationsLow energy usageCan operate at maximum efficiency with minimal downtime for maintenanceLow operating costsPackaging Equipment MarketOverviewThe packaging equipment market is set to grow from its current market value of more than $38 billion to more than $47 billion by 2024, according to a new research report.The growing adoption of automation in several industrial sectors is driving growth. Technological advances provide several advantages to industries using these products in packaging applications. For instance, smart sensors offerfault detection, data collection, mobile connectivity,and remote monitoring, boosting efficiency in processes andoperations performed in factories. Industries using traditional packaging equipment are focusing on substituting legacy machinery with new innovative equipment to enable mass production.

ITW INC.CAPITAL PROJECTANALYSISFIN 3504 CASE ASSIGNMENT FALL 20203| P a g eDemand for packaging equipment is primarily driven by the development of energy-efficient equipment, increasing adoption of automated packaging machines and consumer demand for personal care goods. Growing demand for packaging robots from several end-use industries is also a key factor in the packaging machinery market. These machines play a key role in ensuring product safety throughout the value chain. Equipment manufacturers are emphasizing solutions that have minimal environmental impact.High costs associated with the development and installation of packaging equipmentis restricting market growth. Small companies cannot afford to purchase these machines, forcing them to implement manual packaging techniques over automated systems, leading to adoption of an equipment rental business model. In addition, increasing maintenance costs are further hindering industry demand. Periodic maintenance and checks need to be performed to ensure proper operation of the equipment.The food and beverage industry accounted for more than 55% of packaging machinery market share in 2017. Thepackaging equipment market has witnessed growing demand for new machinery from developing markets due to the increase in spending on a wide range of processed and ready-to-go food and beverage products. To satisfy demand, several major companies operatingin the food and beverage industry are looking to expand in untapped markets by building new plants and purchasing new machinery. In addition, with changing consumer preferences, food and beverage companies are expected to introduce a range of new productsthat require innovative or newer packaging machinery.Packaged Food & Beverage IndustryConsumer preferences reflect products withbold flavors and meal-replacing snacks. In addition, health and wellnessproducts, particularly in the form of immunity-boosting foods, are also on consumers minds. Consumers are looking for nutrition-packed foods. Plant-based meats in the form of burgers and chicken nuggets will also continue to rise in favor with consumers, as well as dairy milk substitutes fromalmonds, soy beans, cashews, coconuts and morewhich have caused disruption in the traditional dairy market. Consumers continue to demandan increase for healthier, quality frozen food products to accommodate changing lifestyles, particularly for the maturing millennial generation who are now balancing building a healthy family and career.Consumers are focusing more onclean eating and have a strong interest in not only what a product is but how it is made and by whom.Transparency into how food is madeand where will be key for food businesses. With todays instant access to information, if consumers cant understand or find out where and how a product is made and whats in it, theyll be more inclined to leave it behind in search of alternative products made by companies that have a genuine commitment to sustainability and improving the environment.Consumers will continue to demand to know more about the foods they eat.Food safety is now costing the food and beverage industry billions each year. It will be more important than ever for the industry to pinpoint safety issues immediately. Food companies will need to be mindful of waste reduction as consumers demand sustainable, transparent production and packaging in the products they purchase. Regenerative, upcycling, biodiverse and organic farming and food

ITW INC.CAPITAL PROJECTANALYSISFIN 3504 CASE ASSIGNMENT FALL 20204| P a g eproduction will also continue to rise per consumer demand; speed-to-market, quality control and safety must all be a part of this process.Project DetailsThe following are the assumptions developed by the ITW1000 Production and Sales & Marketing Departments (the Project Team). Development Expenditures (Period 0)The following are the expected expenses and capital expenditures:Manufacturing expenses for ten test machines $4,450,000 Engineering including salaries and wages of $2,050,000 General and administrative expenses $650,000 Expenses to transport the ITW1000 to ten test customer locations and to install them for testing $35,000 per machine Sales and marketing expenses of $2,425,000Capital expenditures for the needed manufacturing equipment $13,050,000$9,800,000 of equipment to be depreciated under 5-year MACRS$3,250,000 of equipment to be depreciated under 3-year MACRSMACRS table are suppliedAt the end of year 8 it is estimated the equipment can be sold for 20% of itsoriginal costInitial working capital investment of $500,000Years 18The Project Team determined to evaluate the ITW1000 over an eight-year life. However, it believes its economic life could be longer but concluded eight years would be conservative in evaluating the economics of the project. The Project Team has developedthe following forecast assumptions.Pricing per unit is as follows:o$765,000 per unito$32,000 per unit annual maintenance agreementoBoth are expected to have annual price increases of 3% per yearoNumber of units sold:Year 1 - 50Year 2 75Year 3 125Year 4 150Year 5 170Year 6 170Year 7 135Year 8 110

ITW INC.CAPITAL PROJECTANALYSISFIN 3504 CASE ASSIGNMENT FALL 20205| P a g eoDirect material expense per unit is expected to be $400,000 in the year ofintroduction and will increase 3% per yearoManufacturing labor expense:Direct labor full-time-equivalents (FTE) of 2.5 per machine at a cost of$70,000 per FTEIndirect labor FTE (1.5) per machine at a cost of $55,000 per FTELabor costs will increase at 2.0% annuallyoDirect overhead will be 8.0% of direct material cost in year 1 decreasing .5% eachyear thereafter (i.e. for year 2: 8.0% - .5% = 7.5%)oIndirect overhead will be 3.0% of direct material cost in year 1 decreasing .25%each year thereafteroSales and marketing expenses will be 7.5% of total revenue in year 1 decreasing .75%each year thereafteroGeneral and administrative expenses will be 5% of total revenue in year 1 decreasing.5% each year there afterWorking capital assumptionsAs noted above the initial working capital investment is $500,000End of year working capital is projected to be 2.0% of the current years revenueAt the end of year 8 the working capital accounts will be zeroOtherMarginal tax rate 25%Required ratesof return:oCost savings projects 10%oProduct line extensions 12%oNew products 14%Financial Planning & Analysis DepartmentYou are a financial analyst in the Companysfinancial planning and analysis department. You have been assigned to the Project Teamto develop a capital project analysis which will be part of the presentation made to the Companyscapital projects committee to obtain approval in order to move forward with development of ITW1000.

ITW INC.CAPITAL PROJECTANALYSISFIN 3504 CASE ASSIGNMENT FALL 20206| P a g eThe committee requires Excel analyses which should include:Preparation of a dynamic (i.e. formulas should be linked to assumptions) project forecastmodel in ExcelNPV and IRR analysesThe following three sensitivity analyses need to be performed:1.If the working capital assumption increases from 2.0% to 3.0% what is the impacton NPV/IRR2.What if labor costs increase 3.0% annually instead of 2.0% what is the impact onNPV/IRR