Product AA batteries

Battery Sales: The batteries are sold wholesale in boxes. Two categories are available.

• Box 4P: Box containing fifty 4-pack blister packets. It is sold wholesale for $279/box.
• Box 2P: Box containing fifty 2-pack blister packets. It is sold for $169/box.

Variable Cost Estimates:

• Box 4P - $100/box for the box containing 50 four-pack blister packets.
• Box 2P - $60/box for the box containing 50 two-pack blister packets.

Fixed Expenses:

• Annual fixed expense = $8 million/year for years 1 thru 8.

Estimate of worldwide unit sales (shown in thousands of units):

• Box 4P: 120, 135, 145, 150, 140, 140, 130 and 130 for years 1 thru 8.
• Box 2P: 60, 70, 90, 90, 90, 80, 70 and 70 for years 1 thru 8.

New Equipment Acquisition:

• Equipment A purchased immediately for $65 million. It is depreciated using 7-year MACRS method. (MACRS/7Y: Depreciation % by year: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93 and 4.46)
• Equipment B purchased at end of 2^nd year for $8 million. It is depreciated using 7-year St-line method. (Straight Line / 7 years: Depreciation % by year: 14.2857% per year for 7 years)
• Equipment C purchased at end of 3^rd year for $8 million. It is depreciated using 5-year MACRS method. (MACRS/5Y: Depreciation % by year: 20.00, 32.00, 19,20, 11.52, 11.52 and 5.76)

Net working capital requirements:

The working capital requirement is expected to be 25% of sales.

Erosion:

Lion currently produces other types of batteries in size AA Alkaline, Nickel-Metal Hydride (NiMH), and Nickel Cadmium (NiCad). Introduction of Lithium batteries will impact the sales of current batteries of same size. The estimated erosion is $4 million/year on sales. The variable costs associated with current product line is 25% of revenue of current product line, and naturally the firm will incur correspondingly lower variable cost. There is no impact on fixed cost.

Tax rates

• Marginal income tax rates: Federal = 28%, Ohio = 6.5%, Berea = 2%.
• Capital Gains Tax Rate = 20%

Minimum acceptable rate of return (MAAR)

• Lion Corporations before tax MARR is 20%

Project life and terminal values

• The expected life of the project is 8 years.
• At the end of that life, the equipment is expected to be sold for $14 million.

1. a) What is the NPV?

b) What is the IRR?

c) What is the Discounted Payback?

d) What is Profitability Index?