Some data Conch Manufacturing is a start up manufacturer of Bulldozers, Cranes, and other heavy equipment, and this company has newly located to Zionsville, IN The company president is Shelly Silver Spoon, who inherited the company, and he intends to compete with and eventually overtake Caterpillar as the worlds leader for heavy equipment manufacturing His sales team consists of the recently retired sales managers of Caterpillar The company bought an abandoned GM plant on the west side of Indianapolis and will remodel that to produce heavy equipment The company was founded three years ago Jay Spreadsheet, a recent IUPUI graduate, has been hired by the company into its finance department Silver Spoon has been surveying the context of the economic environment and is confident that he can readily overtake Caterpillar After all, he has an experienced sales team, a low overhead, abandoned building for the manufacturing site, and close proximity to railroad facilities as well as to the Indianapolis International Airport for parts delivery He assumes the production process will be fairly easy in that he has hired Dave Vaporware, a recent graduate of IUPUI in Motorsports Technology, who understands speed Jay assumes that the knowledge of speed can be easily transferred into mass production process for heavy equipment and make the process speedy Jay needs to invest in some manufacturing robots probably 3 such robots to assemble the heavy equipment He has located these assembly robots at the suggestion of Dave Vaporware The robots will be programmed to assemble all 750,000 parts of a bulldozer including engine installation and testing, painting, and other speedy details Dave Vaporware has told both Shelly Silver Spoon and Jay Spreadsheet that he can reduce the production time from an industry average of 60 days to 30 days at Conch Manufacturing The following data relates to the new Robots The new robots carry an Initial Investment outlay $10,000,000 that includes cost of the robots, shipping and installation, a working capital parts inventory to keep these expensive machines in operation, and the cost of financing via and external source because Jay Spreadsheet knows that cash on the balance sheet only equals $75,000 i e , practically zero in the overall context so, they will have to seek external financing A very reliable financial advisor with significant commercial experience in the area of external financing alternatives between debt vs equity financing for projects indicated to Jay Spreadsheet that he should use a Convertible Bond which itself will carry a Flotation Cost equal to 6 of the project Jay now wishes he hadnt skipped the last slide in his professors external financing lecture about how flotation costs affect capital budgeting But, he knows that he must understand how the Flotation Cost of 6 affects the project The Robots will have an estimated five year lives, and have no salvage value at the end Depreciation is straight line to zero Sales are projected at 300 units per year Price per unit will be $310,000, variable costs will be $195,000 per unit, and Fixed Costs will be $7,000,000 per year The company requires a 12 percent required rate of return on any new project, and the relevant tax rate is 24 Mr Silver Spoon has asked Jay Spreadsheet to provide answers to the following questions Within the context of the Economic Cycle, describe and discuss Sources of Value related to this project What is the reasonableness of this project being undertaken from Sources of Value practicalities Discuss pros and cons using ideas you may surface from the Economic Cycle Calculate the base case Net Present Value 2 b Construct a NPV Profile 2 c Calculate the IRR Based upon the conclusion to 2, 2 b, and 2 c, does this project clear the rational economic hurdle for you to proceed Explain your observations Analyze this project using a Scenario Analysis You will assume that price, unit sales, variable costs, and fixed costs are accurate to within 15 Calculate the Optimistic case NPV and the Pessimistic case NPV Show your determination of NPV for the Base Case, Optimistic Case, and Pessimistic Case Based upon your work from 4, write a 2 3 sentence analysis of your findings recommendations i e , does the NPV hold at the Optimistic and the Pessimistic assumption How does IRR compare to WACC What do you recommend as a next step Now, continue your analysis using sensitivity What is the sensitivity of the projects NPV to changes in Fixed Costs What is the sensitivity of the projects NPV to changes in Sales Quantity What is the sensitivity of the projects NPV to changes in Variable Costs What is the sensitivity of the projects NPV to changes in Price Rank your findings in sensitivity from most sensitive to least sensitive in affecting NPV What is the sensitivity of the projects OCF to changes in Fixed Costs What is the sensitivity of the projects OCF to changes in Sales Quantity What is the sensitivity of the projects OCF to changes in Variable Costs What is the sensitivity of the projects OCF to changes in Price You now have completed the scenario and sensitivity analyses for all variables, and you have placed the variables in rank order regarding sensitivity of the Projects NPV Write a one page conclusion with recommendations to your boss, Jay Spreadsheet, about your observations and analyses so far NOTE Consider this a professional document to your boss thus, be sure the document is neat, spell checked, logically presented, etc Calculate the Operating Cash Break Even quantity level at the Base Case for this project Calculate the Accounting Break Even quantity level at the Base Case for this project Calculate the Financial Break Even level of output at the Base Case for this project Calculate EAC Discuss your observations relating to these Break even calculations i e , do you see anything remarkable in the calculated break evens, or do you have any concerns about this calculation compared to the base case and when compared to the Economic Cycle Calculate the Degree of Operating Leverage at the Financial Break even point calculated in 17 above What is the Degree of Operating Leverage at the BASE case of 300 forecasted units If units sold decrease from the projected 300 units per year to only 150 units per year, what will be the decrease in Operating Cash Flow dollars 20 b Recalculate the NPV assuming 150 units instead of the original base case that assumed 300 units What will be the New Operating Cash Flow assuming 150 units will be the sustainable sales rate What will be the NEW Degree of Operating Leverage at the newly established sales units of 150 Discuss you observations about Risk for this project given that DOL becomes a surrogate measure for risk, and this measure becomes more problematic if sales decline than if sales increase Now based upon your overall analysis of this project, summarize your observations and recommendations to your boss about whether this project should, after all, be pursued Factor your several observations into this paragraph Your boss is relying on you to present an articulate argument about whether this project should be pursued

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Some data: Conch Manufacturing is a start-up manufacturer of Bulldozers, Cranes, and other heavy equipment, and this company has newly located to Zionsville, IN. The

Some data: Conch Manufacturing is a start-up manufacturer of Bulldozers, Cranes, and other heavy equipment, and this company has newly located to Zionsville, IN. The company president is Shelly Silver-Spoon, who inherited the company, and he intends to compete with and eventually overtake Caterpillar as the worlds leader for heavy equipment manufacturing. His sales team consists of the recently retired sales managers of Caterpillar. The company bought an abandoned GM plant on the west side of Indianapolis and will remodel that to produce heavy equipment. The company was founded three years ago. Jay Spreadsheet, a recent IUPUI graduate, has been hired by the company into its finance department. Silver-Spoon has been surveying the context of the economic environment and is confident that he can readily overtake Caterpillar. After all, he has an experienced sales team, a low-overhead, abandoned building for the manufacturing site, and close proximity to railroad facilities as well as to the Indianapolis International Airport for parts delivery. He assumes the production process will be fairly easy in that he has hired Dave Vaporware, a recent graduate of IUPUI in Motorsports Technology, who understands speed. Jay assumes that the knowledge of speed can be easily transferred into mass production process for heavy equipment and make the process speedy. Jay needs to invest in some manufacturing robots probably 3 such robots - to assemble the heavy equipment. He has located these assembly robots at the suggestion of Dave Vaporware. The robots will be programmed to assemble all 750,000 parts of a bulldozer including engine installation and testing, painting, and other speedy details. Dave Vaporware has told both Shelly Silver-Spoon and Jay Spreadsheet that he can reduce the production time from an industry average of 60 days to 30 days at Conch Manufacturing.

The following data relates to the new Robots: The new robots carry an Initial Investment outlay $10,000,000 that includes cost of the robots, shipping and installation, a working capital parts inventory to keep these expensive machines in operation, and the cost of financing via and external source because Jay Spreadsheet knows that cash on the balance sheet only equals $75,000; i.e., practically zero in the overall context; so, they will have to seek external financing. A very reliable financial advisor with significant commercial experience in the area of external financing alternatives between debt vs. equity financing for projects indicated to Jay Spreadsheet that he should use a Convertible Bond which itself will carry a Flotation Cost equal to 6% of the project. Jay now wishes he hadnt skipped the last slide in his professors external financing lecture about how flotation costs affect capital budgeting. But, he knows that he must understand how the Flotation Cost of 6% affects the project. The Robots will have an estimated five year lives, and have no salvage value at the end. Depreciation is straight-line to zero. Sales are projected at 300 units per year. Price per unit will be $310,000, variable costs will be $195,000 per unit, and Fixed Costs will be $7,000,000 per year. The company requires a 12 percent required rate of return on any new project, and the relevant tax rate is 24%.

Mr. Silver-Spoon has asked Jay Spreadsheet to provide answers to the following questions:

Within the context of the Economic Cycle, describe and discuss Sources of Value related to this project. What is the reasonableness of this project being undertaken from Sources of Value practicalities? Discuss pros and cons using ideas you may surface from the Economic Cycle.

Calculate the base-case Net Present Value.

2-b: Construct a NPV Profile

2-c: Calculate the IRR

Based upon the conclusion to #2, 2-b, and 2-c, does this project clear the rational economic hurdle for you to proceed? Explain your observations.

Analyze this project using a Scenario Analysis. You will assume that price, unit sales, variable costs, and fixed costs are accurate to within +/- 15%. Calculate the Optimistic-case NPV and the Pessimistic-case NPV. Show your determination of NPV for the Base Case, Optimistic Case, and Pessimistic Case.

Based upon your work from #4, write a 2 3 sentence analysis of your findings/recommendations; i.e., does the NPV hold at the Optimistic and the Pessimistic assumption? How does IRR compare to WACC? What do you recommend as a next step?

Now, continue your analysis using sensitivity.

What is the sensitivity of the projects NPV to changes in Fixed Costs?

What is the sensitivity of the projects NPV to changes in Sales Quantity?

What is the sensitivity of the projects NPV to changes in Variable Costs?

What is the sensitivity of the projects NPV to changes in Price

Rank your findings in sensitivity from most sensitive to least sensitive in affecting NPV.

What is the sensitivity of the projects OCF to changes in Fixed Costs?

What is the sensitivity of the projects OCF to changes in Sales Quantity

What is the sensitivity of the projects OCF to changes in Variable Costs?

What is the sensitivity of the projects OCF to changes in Price?

You now have completed the scenario and sensitivity analyses for all variables, and you have placed the variables in rank order regarding sensitivity of the Projects NPV. Write a one-page conclusion with recommendations to your boss, Jay Spreadsheet, about your observations and analyses so far. NOTE: Consider this a professional document to your boss; thus, be sure the document is neat, spell-checked, logically presented, etc.

Calculate the Operating Cash Break-Even quantity level at the Base Case for this project.

Calculate the Accounting Break-Even quantity level at the Base Case for this project.

Calculate the Financial Break-Even level of output at the Base Case for this project.

Calculate EAC

Discuss your observations relating to these Break-even calculations; i.e., do you see anything remarkable in the calculated break-evens, or do you have any concerns about this calculation compared to the base case and when compared to the Economic Cycle.

Calculate the Degree of Operating Leverage at the Financial Break-even point calculated in #17 above.

What is the Degree of Operating Leverage at the BASE case of 300 forecasted units?

If units sold decrease from the projected 300 units per year to only 150 units per year, what will be the decrease in Operating Cash Flow dollars?

20-b. Recalculate the NPV assuming 150 units instead of the original base case that assumed 300 units.

What will be the New Operating Cash Flow assuming 150 units will be the sustainable sales rate?

What will be the NEW Degree of Operating Leverage at the newly established sales units of 150?

Discuss you observations about Risk for this project given that DOL becomes a surrogate measure for risk, and this measure becomes more problematic if sales decline than if sales increase.

Now based upon your overall analysis of this project, summarize your observations and recommendations to your boss about whether this project should, after all, be pursued. Factor your several observations into this paragraph. Your boss is relying on you to present an articulate argument about whether this project should be pursued.