PART 2: CAPEX (5 Marks) As stated in Mr. Lazyboy's memo from Part 1, PlastiTubes is considering an investment in a new FRP Filament Winder that will improve the quality and reliability of its manufacturing processes, simultaneously eliminating a significant proportion of its variable costs. Filament winding is the process of winding resin-impregnated fibre on a mandrel surface in a precise geometric pattern. This is accomplished by rotating the mandrel while a delivery head, under computer control, precisely positions continuous strands of fibres on the mandrel surface. Compared to its existing, labour intensive, manufacturing process this investment significantly increases the company's operating leverage. The plant will cost $10 million plus a further $100,000 investment in inventory at the start of the project, and is expected to last for seven years before it needs replacing. The new plant is expected to generate an additional $6.8 million revenue in its first year and achieve a growth rate in revenues of 10% for the next two years, flattening out at 5% for the remainder of the plant's life. Variable costs are projected to be 45% of sales in the first year and will then grow at a constant rate of 4% thereafter (i.e. they are not 100% variable with respect to sales). Fixed costs (excluding depreciation) of $2.5 million are anticipated each year. The new plant would be depreciated on a straight line basis over the seven years to a residual value of $3 million. The company's production manager has asked your finance team to complete a financial analysis for the investment. He will make a recommendation to the board of directors based, in part, on your financial analysis and report. a) Prepare a thorough analysis of the proposal on Excel. Print a copy of this analysis on a single A4 sheet and attach it to your assignment. (3 marks) b) From your analysis, recommend whether PlastiTubes should accept the proposed investment and explain why or why not. (1 marks) c) From your analysis, explain what might have happened if PlastiTubes had used Mr. Lazyboy's WACC (from Part 1) to evaluate this proposal. (1 marks) PART 2: CAPEX (5 Marks) As stated in Mr. Lazyboy's memo from Part 1, PlastiTubes is considering an investment in a new FRP Filament Winder that will improve the quality and reliability of its manufacturing processes, simultaneously eliminating a significant proportion of its variable costs. Filament winding is the process of winding resin-impregnated fibre on a mandrel surface in a precise geometric pattern. This is accomplished by rotating the mandrel while a delivery head, under computer control, precisely positions continuous strands of fibres on the mandrel surface. Compared to its existing, labour intensive, manufacturing process this investment significantly increases the company's operating leverage. The plant will cost $10 million plus a further $100,000 investment in inventory at the start of the project, and is expected to last for seven years before it needs replacing. The new plant is expected to generate an additional $6.8 million revenue in its first year and achieve a growth rate in revenues of 10% for the next two years, flattening out at 5% for the remainder of the plant's life. Variable costs are projected to be 45% of sales in the first year and will then grow at a constant rate of 4% thereafter (i.e. they are not 100% variable with respect to sales). Fixed costs (excluding depreciation) of $2.5 million are anticipated each year. The new plant would be depreciated on a straight line basis over the seven years to a residual value of $3 million. The company's production manager has asked your finance team to complete a financial analysis for the investment. He will make a recommendation to the board of directors based, in part, on your financial analysis and report. a) Prepare a thorough analysis of the proposal on Excel. Print a copy of this analysis on a single A4 sheet and attach it to your assignment. (3 marks) b) From your analysis, recommend whether PlastiTubes should accept the proposed investment and explain why or why not. (1 marks) c) From your analysis, explain what might have happened if PlastiTubes had used Mr. Lazyboy's WACC (from Part 1) to evaluate this proposal. (1 marks)