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7830 Nov.Dec 2015 Final Exam - New Product Line Scenario Make sure you read, understand and apply all elements in scenario ... CFO REQUEST You are the new finance manager just hired. Your new company is paying you $200,000 in base salary with a 50% bonus. Your first assignment given to you by the CFO is to decide whether to launch a HIGH END bicycle line. Your company has enjoyed profits in the mid to low end markets, but growth has stagnated. Your marketing department sees a niche in the high-end market now. MARKETING DATA price of new product for 1st year $ 390 price increase each year $ 100 price of new product for 1st year should be DIRECT COSTS + this gross-up 30.0% EG: if an item has direct costs of $100, a 20% gross-up = $20. Sales price would be $100 + $20(markup) = $120 total. SALES DATA # of new bikes sold in year 1 yearly increases - for bikes sold 1,000 2,000 COSTS OF NEW BIKE cost of new manufacturing machine (which includes taxes, delivery and installation) $ 800,000 Direct Costs Direct Costs cost of labor / per bike made cost of materials / per bike made $ $ 100 200 cost of new facility addition cost of new sales person. Starts in year 0. $ $ 150,000 125,000 $ $ $ $ $ $ 1,075,000 100,000 200,000 800,000 14,500,000 16,675,000 $ $ $ $ $ $ 300,000 1,015,000 5,000,000 10,000,000 360,000 16,675,000 BALANCE SHEET DATA cash marketable securities accounts receivable inventory property, plant & equipment (PP&E) total assets rates current liabilities long term debt (7% of the PP&E was financed with long term debt) preferred stock common stock (there are $2 of common stock to every $1 of preferred stock) retained earnings total liab + equity INCOME STATEMENT DATA revenues (for previous year before the launch of new bike line) net profit margin use this dividend payout ratio to calculate dividends paid out to shareholders net profits - transferred to retained earnings 4% 8% 10% $ $ LOAN DATA -- CFO tells you the following: 1. If company has to take a loan, the cheapest money it can get is ... 2. Term of loan are these # of years ... 3. It is OK to exhaust this% of marketable securities for the purchase of a new machine. BUDGET INFORMATION operating expense allocation - per bike facility depreciation (in years) new machine depreciation (in years) income tax rate 7830 Final Exam (Mar.Apr 2016) - MOCK (only post PDF). - 1 2,000,000 30% 40% 360,000 5.0% 3 80% $ 60.00 5 10 30% 4/19/2016 NAME 1. 534 SHOULD WE DO THE PROJECT? Is Marginal Benefits > Marginal Costs? 1. CASH INFLOWS (10 pts) yr0 price of new product yr1 $ # of new bikes sold (annually) 390 $ 1,000 NET CASH INFLOWS 2. CASH OUTFLOWS (10 pts) yr2 $ per bike yr0 390,000 yr3 490 $ 590 3,000 $ 1,470,000 total 5,000 $ 2,950,000 9,000 $ 4,810,000 cost of new machine yr2 yr3 total 1,000 # of bikes sold each year yr1 3,000 5,000 9,000 (800,000) (800,000) cost of labor 100 (100,000) (300,000) (500,000) (900,000) cost of materials 200 (200,000) (600,000) (1,000,000) (1,800,000) cost of additional facility (150,000) cost of new sales person (125,000) (125,000) (125,000) (125,000) (500,000) NET CASH OUTFLOWS (1,075,000) (425,000) (1,025,000) (1,625,000) (4,150,000) amount rate interest exp long term debt 1,015,000 4.00% 40,600 preferred stock 5,000,000 8.00% 400,000 common stock 10,000,000 10.00% 1,000,000 3. WACC (10 pts) WEIGHTED AVG COST OF CAPITAL 7830 Final Exam (Mar.Apr 2016) - MOCK (only post PDF). - 1 (150,000) 16,015,000 denominator Decimals 9.00% 1,440,600 Numerator 5:24 PM NAME SHOULD WE DO THE PROJECT? Is Marginal Benefits > Marginal Costs? 4. NET PRESENT VALUES (20 pts) WACC yr0 yr2 yr3 total 390,000 total cash inflows yr1 1,470,000 2,950,000 4,810,000 total cash outflows (1,075,000) (425,000) (1,025,000) (1,625,000) (4,150,000) net cash outflows (1,075,000) (35,000) 445,000 1,325,000 660,000 1.09 enter 2 ytox and 1/x period discount rate 1 weighted avg cost of capitol 9.00% NPV 1 ytox and 1 over x (1,075,000) 91.75% (32,111) 1075 chs gcfo 35 chs gcfj 445 gcfj 1325 gcfj f irrcalculating Irr What is NPV of project? DO WE DO THE PROJECT? (YES or NO)? Calculate the IRR? 5. LOAN AND LOAN PAYMENT (10 pts) yr0 what cash is available now? 2 84.18% 374,580 $ 660,000 3 77.23% 1,023,275 290,743 290,743 18.84% int rate term (yrs) 5.0% loan loan pmt 3 (80,000) (29,377) 1,075,000 how much can be used from marketable securities? total cash available 80,000 1,155,000 what are cash outlays in Yr0 (1,075,000) how much do we need to borrow? 80,000 WHAT IS LOAN AMOUNT GOING TO BE? AND WHAT IS LOAN PAYMENT? 6. INTEREST EXP PAYMENTS (10 pts) net cash flows year interest rate loan bal interest exp principal payment yr1 5.0% (80,000) (4,000) (25,377) (29,377) yr2 5.0% (54,623) (2,731) (26,646) (29,377) yr3 5.0% (27,978) (1,399) (27,978) (29,377) (8,130) (80,000) (88,130) LOAN DATA 7830 Final Exam (Mar.Apr 2016) - MOCK (only post PDF). - 2 5:24 PM NAME SHOULD WE DO THE PROJECT? Is Marginal Benefits > Marginal Costs? 7. FINANCIAL BUDGET (20 pts) costs rates / yrs yr1 yr2 yr3 total 390 1,470 2,950 4,810 direct materials (200) (600) (1,000) (1,800) direct labor (100) (300) (500) (900) new sales person (125) (125) (125) (375) (35) 445 60 (60) (180) useful lives (95) 265 --- Report all numbers in thousands --revenues for new bicycle line gross profit operating expense allocation alloc per bike > operating profit (EBITDA) costs 1,325 1,735 (300) (540) 1,025 1,195 facility depreciation (150,000) 5 (30) (30) (30) (90) new machine depreciation (800,000) 10 (80) (80) (80) (240) 4 3 1 8 (201) 158 916 873 (275) (262) 641 611 interest pretax income taxes (if pretax is negative, tax # should be positive. tax rate Like getting a refund) 30% NET INCOME 60 (141) (47) 110 total net income 8. RATIO ANALYSIS (10 pts) 611 yr1 yr2 yr3 total -9.0% 30.3% 44.9% 36.1% operating margin -24.4% 18.0% 34.7% 24.8% net margin -36.1% 7.5% 21.7% 12.7% gross margin 7830 Final Exam (Mar.Apr 2016) - MOCK (only post PDF). - 3 yr0 $ 5:24 PM