MINICASE CEO of Sheetbend& Halyard Inc., confidential envelope. It contained a draft of a competi- could be deprciated on the Jack Tar, C ernaThe new machinery would cost $1 million. This investment for a contract to supply duffel canvas to the US Navy from Sheetbend's CEO asked Mr. Tar to reyiewyears . The refurbi hod plant and new machinery would last for many The cover memo he bid hefore it was submitted. However, the remaining small, and it was not clear that additional orders could be The bid and its supporting documents had been prepared by oed once the navy contract was letbend's sales staff. It called for Sheetbend to supply 100,000 was custom-built and could finished. The machinery be used only for duffel canvas. of duffel canvas per price was fixed at $30 per yard. ycars. The proposed selling not usually involved in sales, but this bid was least two respects. First, if accepted by the navy, Its secondhand value at the end of 5 years was probably zero Table 9.4 shows the sales staff's forecasts of income from the navy contract. Mr. Tar reviewed this forecast and decided that its assumptions were reasonable, except that the forecast used ould commit Sheetbend to a fixed-price, long-term contract. book, not tax, depreciation. cing the duflel canvas would require an investment. But the forecast income st lion o purchase machinery and to refurbish Sheetbend's working capital. Mr. Tar thought that working capital wou easantboro, Maine. Mr. Tar set to work and, by the end of the week, had collected average about10% ofsale - following facts and assumption The plant in Pleasantboro had been built in the early 1900s and is now idle. The plant was fully depreciated on Sheetbend's Armed with this information, Mr. Tar constructed a spreadsheet to calculate theNy of the duffel canvas project, assuming that Sheetbend's bid would be accepted by the navy books, except for the purchase cost of the land of $10,000. He had just finished debugging the spreadsheet when another Now that the land was valuable shorefront property, Mr. Tar confidential envelope arrived from Sheetbend's CEO. It contained thought the land and the idle plant could be sold, immediately a firm offer from a Maine real estate developer to purchase or in the near Sheetbend's Pleasantboro land and plant for $1.5 million in cash 0,000 Refurbishing the plant would cost $500,000. This investment Should Mr. Tar recommend submittin the at the id be depreciated for tax purposes on the 10-year MACRS proposed price of $30 per yard? The discount rate for this project IS TABLE 9.4 Forecast income statement for the U.S. Navy duffel canvas project (dollar velues in thousands, except price per yard Year 3 5 100.00 100.00 100.00 100.00 100.00 30.00 3,000.00 3,000.00 3,000.00 3,000.00 3,000.00 2.100.00 2.184.00 2.271.36 2.362.21 2.456.70 5. Operating cash flow (3-4) 900.00 816.00 728.64 637.79 543.30 250.00 250.00250.00250.00 250.00 1. Yards sold 2. Price per yard 30.00 30.00 30.00 30.00 3. Revenue (1 x 2) 4. Cost of goods sold 6. 7. Income (5- 6) 8. Tax at 35% 9. Net income (7 -8) 650.00 566.00 478.64 387.79 293.30 22750 198.10 16752135.72102.65 $422.50 $367.90 $311.12 $25207 $190.65 t Yards sold and price per yard would be fixed by contract 2. Cost of goods includes fxed cost of $300000 per yeer plus variable costs of $18 per yard Costs are expected to increase at the inflation rate of 4% per year 3 Depreciation: A $1 million investment in machinery s depreciated straight line over 5 yeers ($200,000 per year). The $500,000 cost of refurbishing the Pleasantboro plant is depreciated straight-line over 10 years($50000-per year)