Mid Michigan Manufacturing Inc (MMMI) wishes to determine whether it would be advisable to replace an existing production system with a new automated one They have hired you as a consultant to determine whether the new system should be purchased The data you will need is as follows MMMI has decided to set a project timeline of 4 years The new system will cost $2,600,000 It will be depreciated (straight line) over a five year period (its estimated useful life), assuming a salvage value of $100,000 The old system, which has been fully depreciated, could be sold today for $379,747 The company has received a firm offer for the system from Williamston Widgets, and MMMI will sell it only if they purchase the new system Additional sales generated by the superior products made by the new system would be $2,400,000 in Year 1 In Years 2 and 3 sales are projected to grow by 4 5 per year However, in Year 4 sales are expected to decline by 10 per year as the market starts to become saturated Total expenses have been estimated at 72 5 of Sales The firms tax rate 21 MMMI requires a minimum return on the replacement decision of 7 5 A representative from Stockbridge Sprockets has told MMMI that they will buy the system from them at the end of the project (the end of Year 4) for $446,835 MMMI has decided to include this in the terminal value of the project The project will require $300,000 in additional Net Working Capital, 45 of which will be recovered at the end of the project Part 1 Base Case Complete the DCF Model using the above data, and calculate NPV and IRR Note A consultant has told MMMI that they have estimated there is a 45 chance that the base case will occur VALUE DRIVERS Years 0 1 2 3 4 CAPITAL SPENDING OCF Revenues Expenses Depreciation EBIT Taxes Net Income Depreciation OPERATING CASH FLOW NET WORKING CAPITAL Total Cash Flow NPV IRR VALUE DRIVERS Years 0 1 2 3 4 CAPITAL SPENDING OCF Revenues Expenses Depreciation EBIT Taxes Net Income Depreciation OPERATING CASH FLOW NET WORKING CAPITAL Total Cash Flow NPV IRR

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Mid-Michigan Manufacturing Inc. (MMMI) wishes to determine whether it would be advisable to replace an existing production system with a new automated one. They have

image text in transcribed Mid-Michigan Manufacturing Inc. (MMMI) wishes to determine whether it would be advisable to replace an existing production system with a new automated one. They have hired you as a consultant to determine whether the new system should be purchased. The data you will need is as follows:

MMMI has decided to set a project timeline of 4 years.
The new system will cost $2,600,000. It will be depreciated (straight line) over a five-year period (its estimated useful life), assuming a salvage value of $100,000.
The old system, which has been fully depreciated, could be sold today for $379,747. The company has received a firm offer for the system from Williamston Widgets, and MMMI will sell it only if they purchase the new system.

Additional sales generated by the superior products made by the new system would be $2,400,000 in Year 1. In Years 2 and 3 sales are projected to grow by 4.5% per year. However, in Year 4 sales are expected to decline by 10% per year as the market starts to become saturated.

Total expenses have been estimated at 72.5% of Sales.

The firms tax rate 21%.

MMMI requires a minimum return on the replacement decision of 7.5%.

A representative from Stockbridge Sprockets has told MMMI that they will buy the system from them at the end of the project (the end of Year 4) for $446,835. MMMI has decided to include this in the terminal value of the project.

The project will require $300,000 in additional Net Working Capital, 45% of which will be recovered at the end of the project.

Part 1: Base Case:

Complete the DCF Model using the above data, and calculate NPV and IRR. Note: A consultant has told MMMI that they have estimated there is a 45% chance that the base case will occur.

VALUE DRIVERS Years 0 1 2. 3 4 CAPITAL SPENDING OCF: Revenues Expenses Depreciation EBIT Taxes Net Income Depreciation OPERATING CASH FLOW NET WORKING CAPITAL Total Cash Flow NPV IRR VALUE DRIVERS Years 0 1 2. 3 4 CAPITAL SPENDING OCF: Revenues Expenses Depreciation EBIT Taxes Net Income Depreciation OPERATING CASH FLOW NET WORKING CAPITAL Total Cash Flow NPV IRR