MMini Case #1 Patagonia, Inc. Assignment overview Patagonia, Inc. was founded in May, 2000 by Lawrence Rollins, who was employedfor the last20years as a river rafting guide. Mr. Rollins receivedan unexpectedinheritance of S2,000,000 in Jamary, 2000. Soon after, he decided to leave his lifelong rafting and use his inheritance as seed capital for Patagonia During the first few years ofits existence, Patagomaexperiencedsteady salesgrowth, although the company has onlyrecently shown positive net income. ris March 2016 and the co is considering two altemative processes for inflatable tubes to mpany manufacturing serice demandinarapidly growing market. Management intends tomake the initial investment intbe projectat the end of April, 2016 and expects any cash flows associated with the project to amive yearly, beginning at the end of April, 2017 The first manufacturing process has a higher start-upcost than the second, but greater economiesof scale. The expected cashflows associated with this process arepresentedbelowin Table 1. Table 1 Cash Flow Projections for Process1 250,000 400,000 460,000 400,000 400,000 200,000 200,000 200,000 200,000 200,000 Initial Investment (i,000,000) The second manufacturing process requires asmaller initial investment than the first, and because ofthis itis appealing to some members ofthe board. The expected cashflows associated withthis process are presented in Table 2 below. Table 2 Cash Flow Projections for Process2 733,333 400,000 291,667 66,667 66,667 160,000 160,000 160,000 160,000 160,000 (800,000) The marginal tax rate for the co is 40% and after careful assessment ofthe risk associated with this project, mpany you conclude that the appropriate costofcapital for bothprocesses is 9.75%