Part 3: Is the cost of production efficiency worth the investment? (20 points)

Given below is Marvin Gardens forecast of operations. If they could pay a cost of $300 million today and lower their COGS excluding depreciation to sales ratio by 1%, would this investment be cost effective? (Net Sales in millions of dollars)

	Actual	Forecast
Operations	2019	2020	2021	2022	2023	2024
Sales growth rate	10%	8%	7%	6%	5%	5%
COGS excl. dep. / Sales	76%	76%	76%	76%	76%	76%
Depr. / Net FA	10%	10%	10%	10%	10%	10%
Other op. exp. / Sales	8%	8%	8%	8%	8%	8%
Cash / Sales	1.5%	1.5%	1.5%	1.5%	1.5%	1.5%
Acct. Receivables / Sales	10%	10%	10%	10%	10%	10%
Inventory / Sales	20%	20%	20%	20%	20%	20%
Net FA / Sales	40%	40%	40%	40%	40%	40%
Acct. Payables / Sales	4%	4%	4%	4%	4%	4%
Accruals / Sales	8%	8%	8%	8%	8%	8%
Tax rate	25%	25%	25%	25%	25%	25%
Target WACC	12%
Net Sales	$3,700

1. Project future sales revenues, operating assets and liabilities, operating income, and free cash flows.
2. Should Marvin Gardens focus efforts on growth? Or operating efficiency?
3. Calculate the value of operations at year end 2019 (12/31/2019).
4. Calculate the value of operations again after improvements.
5. Is the investment cost effective? (Is the increase in value greater than the cost of implementation?)