Leisure Manufacturing, Inc. is a producer of grills. Its current line of grills are selling excellently. However, in order to cope with the foreseeable competition from other similar products, LM spent $6,200,000 to develop a new line of expert grills (new model development cost). The grill measurses 55"W x 25"D x 48"H and weighs 60 pounds on two wheels and two stable legs. It has 4 stainless steel tube burners providing a total of 48,000 BTU on a push and turn integrated ignition system using liquid propane gas. It is versifuel compatible. That means it can be converted to use nautral gas with the implementation of the optional versifuel kit. The primary cooking area is 480 sq. inches enabling a cooking capacity of 28 burgers at the same time whereas the warming rack area is 180 sq. inches. In addition to the black stainless steel control panel and two black powder-coated side shelves on the left, the grill has a black stainless steel 12,000-BTU side burner for the preparation of sauces and side dishes on the right. The grill includes a porcelain-coated cast iron cooking grid panel and a black porcelain-coated flame tamer for each individual burner. The warming rack is built with porcelain-coated steel. The lid is made of stainless steel with aluminized steel liner and black steel endcaps. The oval temperature gauge is located in the center of the lid. The same porcelain-coated steel is used to build the bottom bowl. Its porcelain heat plates are designed to reduce flare ups. The company had also spent a further $1,000,000 to study the marketability of this new line of expert grill model (marketability studying cost).

LM is able to produce the expert grills at a variable cost of $60 each. The total fixed costs for the operation are expected to be $10,000,000 per year. LM expects to sell 3,500,000 units, 4,300,000 units, 3,200,000 units, 1,800,000 units and 1,200,000 units of the new grill model per year over the next five years respectively. The new expert grills will be selling at a price of $150 each. To launch this new line of production, LM needs to invest $35,000,000 in equipment which will be depreciated on a seven-year MACRS schedule. The value of the used equipment is expected to be worth $3,800,000 as at the end of the 5 year project life.

LM is planning to stop producing the existing grill model entirely in two years. Should LM not introduce the expert grill, sales per year of the existing grill model will be 1,800,000 units and 1,400,000 units for the next two years respectively. The existing model can be produced at variable costs of $50 each and total fixed costs of $7,500,000 per year. The existing grill model are selling for $115 each. If LM produces the expert grill model, sales of existing model will be eroded by 1,080,000 units for next year and 1,190,000 units for the year after next. In addition, to promote sales of the existing model alongside with the expert grill model, LM has to reduce the price of the existing model to $85 each. Net working capital for the expert grill project will be 20 percent of sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required. The first change in NWC is expected to occur in year 1 according to the sales of the year. LM is currently in the tax bracket of 35 percent and it requires a 20 percent returns on all of its projects. The firm also requires a payback of 3 years for all projects.

You have just been hired by LM as a financial consultant to advise them on this expert grill project. You are expected to provide answers to the following questions to their management by their next meeting which is scheduled sometime next month.

What is/are the sunk cost(s) for this expert grill project? Briefly explain. You have to tell what sunk cost is and the amount of the total sunk cost(s). In addition, you have to advise LM on how to handle such cost(s).

What are the cash flows of the project for each year?

What is the payback period of the project?

What is the PI (profitability index) of the project?

What is the IRR (internal rate of return) of the project?

What is the NPV (net present value) of the project?

Should the project be accepted based on Payback, PI, IRR and NPV? Briefly explain.

The following steps will walk you through on how you should do your calculations for this case study. You follow the instructions and provide your responses accordingly. Please enter ALL the dollar amounts (including cash flows) below in whole numbers. Estimation of sunk costs Provide below the amounts of the sunk costs you identified from the case description above. New model development cost (Use exactly the same wording 1st sunk cost: $ 6,200,000. being as in the case background information.) 2nd sunk cost: $ 1,000,000 being the case background information.) Marketability studying cost (Use exactly the same wording as in Total sunk costs = $ 7200000 Net Sales Estimation: Use the formula stated below to calculate the net sales. Yeart Net Sales =Unit sales of new model for Yeart Price of new model - Reduction in unit sales of existing model for Year t * Current price of existing model - [(Unit sales of existing model for Year t if new model project is not launched - Reduction in unit sales of existing model if new model project is launched) * (Current price of existing model Reduced price of existing model)] Year 1 Net Sales 3,500,000 $ 150 1,080,000 x $ 115 (1,800,000 1,080,000 ) ($ 115 $ 85 ) = $ 379,200,000 Year 2 Net Sales = 4,300,000 $ 150 - 1,190,000 x $ 115 -(1,400,000 1,190,000 )($ 115 $ 85 ) = $ 501,850,000 Year 3 Net Sales = $ 480,000,000 Year 4 Net Sales = $ 270,000,000 Year 5 Net Sales = $ 180,000,000 Variable Cost Estimation: Use the formula stated below to calculate the variable costs. Yeart Variable costs Yeart Variable costs = Unit sales of new model for Year t Variable cost per unit of new model - Reduction in unit sales of existing model for Yeart Variable cost per unit of existing model Year 1 Variable costs = 3,500,000 $ =$ 156,000,000 60 1,080,000 50 Year 2 Variable costs = 4,300,000 $ $ 198,500,000 60 1,190,000 x $ 50 Year 3 Variable costs =$ 192,000,000 Year 4 Variable costs =$ 108,000,000 Year 5 Variable costs =$ 72,000,000 nanveniadton Cadiumdien. Ilmasta falandotad bola...de celelada abadonnaetadionaunanna Depreciation Estimation: Use the formula stated below to calculate the depreciation expenses. Depreciation of Yeart = Cost of equipment MACRS percentage for Yeart [For all MACRS percentages in this part, enter as a decimal number with 4 decimal places.] x 14.29 Depreciation of Year 1 = $ 35000000 Depreciation of Year 2 = $ 35000000 Depreciation of Year 3 = $ 35000000 Depreciation of Year 4 = $ 35000000 Depreciation of Year 5 = $ 35000000 =$ 5,001,500 =$ 8,571,500 =$ 6,121,500 =$ 4,371,500 =$ 3,125,500 Net Working Capital Estimation: Use the formula stated below to calculate the net working capital requirements. NWC for Yeart = NWC Required Percentage * Net sales of Yeart [For the NWC required percentage in this part, enter as a decimal number with 2 decimal places.] II NWC for Year 1 = NWC for Year 2 NWC for Year 3 = NWC for Year 4 = NWC for Year 5 = $ * $ 14.29 * $ x $ * $ x CASH FLOW ESTIMATION: Complete the following table below. Year 1 Year 2 Year 3 Year 4 Year 5 $ $ $ $ $ 379200000 501850000 480000000 270000000 180000000 Sales $ $ $ $ $ 156000000 198500000 192000000 108000000 72000000 VC le $ $ $ Fixed costs 10000000 10000000 10000000 10000000 10000000 $ 5001500 $ 8571500 $ 6121500 $ 4371500 $ 3125500 Dep $ -3122000 $ $ 277278500 || 271878500 $ 94874500 147628500 $ 95157475 $ 51669975 $ 33206075 Taxes (35%) $ 70244475 97047475 X $ $ 130454025 180231025 NI $ 95958525 $ 61668425 176721025 $ 5001500 $ 8571500 $ 6121500 4371500 3125500 + Dep OCF 135455525 188802525 182842525 100330025 64793925 NWC $ 75840000 $ $ 100370000 96000000 Beg 54000000 $ 0 % $ 75840000 $ $ 100370000 96000000 -End 54000000 $ 0 $ -75840000 $ -24530000 $ 4370000 $ 54000000 NWC CF 42000000 $ $ $ $ $ Return to qe $ 59615525 NCE $ $ 164272525 187212525 $ 142330025 121263925 NCF Estimation of total Year 5 cash flow: Provide your responses to the following. At the end of the project's 5-year life, Accumulated depreciation of equipment = $ Book value of equipment = $ Market value of equipment = $ Tax associated with sale of equipment = $ number if tax credit.] [Enter as a positive number if tax liability or as a negative CF on sale of equipment = $ Total Year 5 cash flow = $ Hint: Net CF (Net cash flow) = OCF (Operating cash flow) + NWC CF (Net working capital cash flow) Year 1 through Year 4 cash flow = Net CF of the individual years. Year 5 cash flow = Net CF of Year 5 + CF on sales of equipment. Evaluation of Project: Fill out the following tables. Year o Cash flow $ $ 1 N 3 $ $ 4 5 $ (Do not round your calculations. Round your answers below to the number of decimal places specified.) Evaluation Method (Do not round your calculations. Round your answers below to the number of decimal places specified.) 7 years (2 decimal places) Evaluation Method Payback PI (Profitability Index) IRR (Internal Rate of Return) NPV (Net Present Value) 11.15 (2 decimal places) 255.74 % (2 decimal places) $ (whole number with no decimal place) (Enter "999" for Payback if the project will not payback. The "999" you provided does not mean that the project takes 999 years to payback. It is just that you tell the system that the project will not payback.) The following steps will walk you through on how you should do your calculations for this case study. You follow the instructions and provide your responses accordingly. Please enter ALL the dollar amounts (including cash flows) below in whole numbers. Estimation of sunk costs Provide below the amounts of the sunk costs you identified from the case description above. New model development cost (Use exactly the same wording 1st sunk cost: $ 6,200,000. being as in the case background information.) 2nd sunk cost: $ 1,000,000 being the case background information.) Marketability studying cost (Use exactly the same wording as in Total sunk costs = $ 7200000 Net Sales Estimation: Use the formula stated below to calculate the net sales. Yeart Net Sales =Unit sales of new model for Yeart Price of new model - Reduction in unit sales of existing model for Year t * Current price of existing model - [(Unit sales of existing model for Year t if new model project is not launched - Reduction in unit sales of existing model if new model project is launched) * (Current price of existing model Reduced price of existing model)] Year 1 Net Sales 3,500,000 $ 150 1,080,000 x $ 115 (1,800,000 1,080,000 ) ($ 115 $ 85 ) = $ 379,200,000 Year 2 Net Sales = 4,300,000 $ 150 - 1,190,000 x $ 115 -(1,400,000 1,190,000 )($ 115 $ 85 ) = $ 501,850,000 Year 3 Net Sales = $ 480,000,000 Year 4 Net Sales = $ 270,000,000 Year 5 Net Sales = $ 180,000,000 Variable Cost Estimation: Use the formula stated below to calculate the variable costs. Yeart Variable costs Yeart Variable costs = Unit sales of new model for Year t Variable cost per unit of new model - Reduction in unit sales of existing model for Yeart Variable cost per unit of existing model Year 1 Variable costs = 3,500,000 $ =$ 156,000,000 60 1,080,000 50 Year 2 Variable costs = 4,300,000 $ $ 198,500,000 60 1,190,000 x $ 50 Year 3 Variable costs =$ 192,000,000 Year 4 Variable costs =$ 108,000,000 Year 5 Variable costs =$ 72,000,000 nanveniadton Cadiumdien. Ilmasta falandotad bola...de celelada abadonnaetadionaunanna Depreciation Estimation: Use the formula stated below to calculate the depreciation expenses. Depreciation of Yeart = Cost of equipment MACRS percentage for Yeart [For all MACRS percentages in this part, enter as a decimal number with 4 decimal places.] x 14.29 Depreciation of Year 1 = $ 35000000 Depreciation of Year 2 = $ 35000000 Depreciation of Year 3 = $ 35000000 Depreciation of Year 4 = $ 35000000 Depreciation of Year 5 = $ 35000000 =$ 5,001,500 =$ 8,571,500 =$ 6,121,500 =$ 4,371,500 =$ 3,125,500 Net Working Capital Estimation: Use the formula stated below to calculate the net working capital requirements. NWC for Yeart = NWC Required Percentage * Net sales of Yeart [For the NWC required percentage in this part, enter as a decimal number with 2 decimal places.] II NWC for Year 1 = NWC for Year 2 NWC for Year 3 = NWC for Year 4 = NWC for Year 5 = $ * $ 14.29 * $ x $ * $ x CASH FLOW ESTIMATION: Complete the following table below. Year 1 Year 2 Year 3 Year 4 Year 5 $ $ $ $ $ 379200000 501850000 480000000 270000000 180000000 Sales $ $ $ $ $ 156000000 198500000 192000000 108000000 72000000 VC le $ $ $ Fixed costs 10000000 10000000 10000000 10000000 10000000 $ 5001500 $ 8571500 $ 6121500 $ 4371500 $ 3125500 Dep $ -3122000 $ $ 277278500 || 271878500 $ 94874500 147628500 $ 95157475 $ 51669975 $ 33206075 Taxes (35%) $ 70244475 97047475 X $ $ 130454025 180231025 NI $ 95958525 $ 61668425 176721025 $ 5001500 $ 8571500 $ 6121500 4371500 3125500 + Dep OCF 135455525 188802525 182842525 100330025 64793925 NWC $ 75840000 $ $ 100370000 96000000 Beg 54000000 $ 0 % $ 75840000 $ $ 100370000 96000000 -End 54000000 $ 0 $ -75840000 $ -24530000 $ 4370000 $ 54000000 NWC CF 42000000 $ $ $ $ $ Return to qe $ 59615525 NCE $ $ 164272525 187212525 $ 142330025 121263925 NCF Estimation of total Year 5 cash flow: Provide your responses to the following. At the end of the project's 5-year life, Accumulated depreciation of equipment = $ Book value of equipment = $ Market value of equipment = $ Tax associated with sale of equipment = $ number if tax credit.] [Enter as a positive number if tax liability or as a negative CF on sale of equipment = $ Total Year 5 cash flow = $ Hint: Net CF (Net cash flow) = OCF (Operating cash flow) + NWC CF (Net working capital cash flow) Year 1 through Year 4 cash flow = Net CF of the individual years. Year 5 cash flow = Net CF of Year 5 + CF on sales of equipment. Evaluation of Project: Fill out the following tables. Year o Cash flow $ $ 1 N 3 $ $ 4 5 $ (Do not round your calculations. Round your answers below to the number of decimal places specified.) Evaluation Method (Do not round your calculations. Round your answers below to the number of decimal places specified.) 7 years (2 decimal places) Evaluation Method Payback PI (Profitability Index) IRR (Internal Rate of Return) NPV (Net Present Value) 11.15 (2 decimal places) 255.74 % (2 decimal places) $ (whole number with no decimal place) (Enter "999" for Payback if the project will not payback. The "999" you provided does not mean that the project takes 999 years to payback. It is just that you tell the system that the project will not payback.)