Please answer the following mini case question step by step. Thank you
296 Part Two Value Now that the land was valuable shorefront property, Mr. Tar though: the land and the idle plant could he sold, immediately or in the near future, for $600,000. Remrbishing the plant would cost $500,000. This investment would be depreciated for tax purposes on the 10-year MACRS its assumptions were reasonable, except that the forecast used book, not tax, depreciation. But the forecast income statement contained no mention of working capital. Mr. Tar thought that working capital would average about 10% of sales. schedule. - The new machine'y would cost $1 million. This investment could be depreciated on the 5-year MACRS schedule. - The refurbished plant and new machinery would last for many years. However, the remaining market for duffel canvas was small, and it was not ciear that additional orders could be obtained once the navy contract was nished. The machinery was custom-built and could be used only for duffel canvas. Its secondhand value at the end of 5 years was probably zero. - Table 9.4 shows the sales sta"s forecasts of income from the navy contract. Mr. Tar reviewed this forecast and decided that Armed with this information, Mr. Tar constructed a spreadsheet to calculate the NPV of me duel canvas project, assuming that Sheetbend's bid would be accepted by the navy. He had just nished debugging the spreadsheet when another confidential envelope arrived from Sheetbend's CEO. It contained a rm oer from a Maine real estate developer to purchase Sheet- bend's Pleasantboro land and plant for $1.5 million in cash. Should Mr. Tarrecommend submitting the bid to the navy at the proposed price of $30 pa" yard? The discount rate for this project is 12%. TABLE 9.4 Forecast income statement for me U.S. Navy duffel canvas project (dollar values in thousands. except price per yard) t'rardseold 2.Prioeperyard 3. Revenue (1 x 2) 4. Cost of goods sold 5.0peratlngcash ow(3-4) 5. Depreciation Zlnoome (5 we) 8.033135% 9.Net Income (7 --8) Notes: LYlards sold and price per yard would be lixed by contract. 2. Cost of goods includes fixed cost of $300,000 per year plus variable oasis of $10 per yard. Goals are expected to increase at the hilatlon rate at 4% per year. 3. Depreciationzh $1 million invesn'nent in machinery is depreciated straight-lire over 5 years ($200,000 per year). The $500,001) coal of rerrbiehing the Pleasan'lboro plant is depreciated straight-line over 10 years ($50,000 per year). MINICASE Jack Tar, CFO of Sheetbend 8; Halde Inc. opened the company condentialenvelope.ltcontainedadraftofacompetitivebidfora contract to supply duffel canvas to the US. Navy. The cover memo fnom Sheetbend's CEO aslmd Mr. Tar to review the bid before it was submitted. The bid and its supporting documents had been prepared by Sheetbend's sales sta. It called for Sheetbend to supply 100,000 yands of duffel canvas per year for 5 years. The proposed selling price was xedat$30peryari Mr. Tar was not usually involved in sales, but this bid was unusualinatleasthvorespects.First,ifacceptedhythenavy,it would commit Sheetbend to a xed-price, long-term contract, Sec- ond. producing the duffel canvas would require an investment of $1.5 million to purchase machinery and to refurbish Sheetbend's plant in Pleasantbono, Maine. Mr. 'Iarset toworkandby the end ofthe weekhad collected the following facts and assumptions: - TheplantinPleasantbomhadbeenlmtintheearly 19003 and is now idle. The plant was fully depreciated on Sheetbend's hooks, except for the purchase cost of the land (in 194'?) of $10,000
