Maine Marine Supply, Inc. This core. which is set in o .rmrrft' manufacturing company in! Maine in 230d, dent's with capital expenditure ortor'ysr'sfor at new brothers venture. The venture is o mir't'trtry contract to supply sea bags to the New. Maine Marine Supply, Inc. {HMS}. of Portland, ME, was founded in iii-1t). For the rst hundred years of its life, the company manufactured mostiy canvas sail products (sails, sail bags, and sail covers}. During World IWar II. production shifted to supply ofcoated canvas decking for military ships. Alter lfo't}. the product mix gradually but steadily shifted away from canvas toward nylon and daeton soils. The company also expanded its ship carpentry and ship chandlery businesses aer World War II. By soon, manufacturing accounted for only 25% of sales. But Mir-\"IS was still known for high quality sails and cabinetry and reliable customer service. in 20W, the company bid on a U. S. Navy contract to supply lfl canvas \"sea bags" a year for ve years. MMS bid $25 per bag, fixed for five years. .laclt Sheepshanls, president ofthe company, wanted to grow his manufacturing base and believed this contract was a good way to restart a relationship with the federal government that had been dormant for 55 years. Maine was a generally depressed state in Efllltl that was not fully beneting from the economic boom sweeping the country. The Navy order would allow MMS to bring about it} good, steadyjobs to the Roekland area and reactivate a factory which had been shut down in F935 when MMS lost a contract to supply sail bags and \"pfds\" to West Marina's retail and catalog divisions. The factory was located on a iii-acre ocean front site near Spruce Head. The piant was fully depreciated on MMS' books, except for the Sltl cost of the land {bought in 194?}. The company had turned down $9 for the land in l995 from a real estate developer. Sheepshanls had no idea what the land was worth today. but he didn ~t care since it was not for sale. If the Navy accepted his bid. Sheepsbank was prepared to spend ssoonoo to renovate and relrbish the factory building and grounds and ssoonoo to buy the mannfacmring equipment needed For the contract. He also estimated that he would need to invest about $425.,lllilll in working capital to support die project. He planned to borrow S'P's of the required investment {It} years at ltl% interest ] and fund the balance out of cash reserves. The equipment would be depreciated over 5 years and the building over ll} years. This investment should last much longer, but Sheeps hank. wanted to be conservative in his nancial projections. If the 5-year contract were not renewed. the building and equipment would probably have second-hand salvage value close to note. There wasn't much demand anymore for canvas sea products. \fThere was no shipping expense because the Navy would pay it. He estimated state and federal income taxes at 35% ofprot. He estimated zero incremental administrative or selling costs for this contract. He thought his cash costs would probably grow 4% each year from ination. The Navy procurement ofcer Sheepshank was dealing with expressed serious interest in the hid. He said the $25 price was very competitive, capeeiafly et'rnsiderint._.,t the ve-year xed term of the contract. He asked Sheepshank to submit his 5-year nancial forecast for review by the Navy auditors before recommending acceptance of the bid. Sheepshank said he would supply the requested information right away, even though he wasn't really sure what to submit. He asked his controller, Bill Bowline, what he thought the Navy wanted to see- Bowline had not been involved in developing the bid, but he was aware of the assumptions Sheepshank had made. Bow-line said he thought they should prepare a year by year cash ow forecast and then calculate the \"lRR,\" \"NPV.\" and \"Payback\" for the project. He said he thought 15% was a reasonable estimate of the cost of capital for a company the size of HMS. Bowline also said they probably should include the land value in the project, somehow, but he wasn't sure how. He said he felt sure a real estate developer would pay at least S l ,SJltl for that land now. In the midst of the big boom in the economy, Maine seacoast land was a \"hot item." He knew of a comparable parcel near Hoothbay Harbor that sold recently for more titan $1.5 million. But. land away from the coast was a different story. He knew of a lit-acre tract in an industrial park fronting Interstate 95 near Rockland that sold recently for El. QUESTIONS 1. Prepare the veyear nancial forecast for this project. 2. Calculate the [RR NPV, and Payback. 3. is the proposal a good deal for the Navy? 4. Is it a good deal for HMS