Scenario

Your CEO has asked you to evaluate launching a new product line for your company. Based on your experience and knowledge of the market, you have estimated the following results for the first five (5) years of the Project.

Expected revenues.

Year (000s)
1	2	3	4	5
$80.00	$120.00	$200.00	$320.00	$480.00

The Company yearly purchases (COGS) from suppliers = 50% of the forecasted sales.

General and administrative expenses (wages, taxes, office etc.) are estimated at 15% of sales.

Sales salaries and commissions are estimated to be 10% of sales.

The Project requires and initial equipment investment of $150,000

Annual depreciation expense of the equipment is $30,000

Annual interest expense on the money borrowed to pay for the equipment is $6,000.

The company tax rate is 35%.

Question #1

Using the above projections and the template in Appendix A build a Pro-forma Income Statement for each year of the Project.

In the template below the Income Statement calculate the Operating Cash Flows and Total Cash Flows for each year.

Question #2

Using your initial investment and Total Cash Flows from Question #1 calculate the following for the Project.

Net Present Value

Payback (Breakeven)

Discounted Payback (Breakeven)

Internal Rate of Return

Profitability Index

The company can borrow at 5% for the initial purchase of the equipment.

Question #3

Based on questions 1 & 2 above, and the following management benchmarks, comment on whether the company should move forward with the Project. What other things might you consider in making your decision?

Management Benchmark

Net Present Value Positive

Payback (Breakeven) < 4 years

Discounted Payback (Breakeven) < 4 years

Internal Rate of Return > 20%

Profitability Index > 1

Appendix A Proforma Income Statement

	Year (000s)
	0	1	2	3	4	5
Revenues
COGS
Gross Profit
Expenses
Sales Salaries & Commissions
General & Admin Expenses
Depreciation Expense
Total Operating Expenses
EBIT
Interest
EBT
Less Taxes (35%)
Net Income
Operating Cash Flow
Initial Investment
Total Cash Flows