Summarize in 250 words the key points for the Sheetbend & Halyard case. What were the results of any analysis and what were the key takeaways/conclusion.
tion tax shield is higher when the inflation rate is lawer. Jack T. CFO of Sheethend&Halyard Inc., opened the internalThe new machinery would cost S1 million. This investment company confidential envelope. It contained a draft of a competi cod be depreciated on the 5 year MACRS schedule. tive bid for a contract to supply duffel canvas to the U.S. Navy. The refurbished plant and new machinery would last for many The cover memo from Sheetbend's CEO asked Mr. to renew years. However, the remaining market for dufel canvas was small, and it was not clear that additional orders could be The bid and its supporting documents had been prepared by btained once the navy contract was finished. The machinery Sheetbend's sales staff. It called for Sheethend to supply 100,000 was custom built and could be used only for duffel canvas. yards of duffel cunvas per year Sor 5 years. The proposed sellings secodhand value at the end of 5 years was prohably zero. Table 9.4 shows the sales staff's forecasts of income from the was vctac Mr. Tur reviewed this forecast and decided that its assumptions were reasonable, excepe that the forecast used Mr. Tar was not usually involved in sales, but this bid unusual in at least two respects. First i accepted by the nay.its Second, producing the duffel canvas would require an investment of $I 5 million to purchase machinery and to refurhish Sheetbend's ut the Sarecast income statement contained no mention o working capital. Mr. Tar thought that working capital would Mr. Tar set to work and, by the end of the week, had collected The plant in Pleasantbaro had been built in the early 1900s and to calculate the NPV of the duffel canvas project, assuming that is now idle. The plant was fully depreciated on Sheetbend's Sheetbend's bid would be accepted by the navy books, except for the purchase cost of the land of $10,000. He had just finished debugging the spreadsheet when another Now that the land was valuable sharefruet peoperty. Mr. Tur confidential envelope arrived from Sheetbend's CEO. It coctained a firm offer from a Maine real estate developer to purchase thought the land and the idle plant could be sold, immediately or in the near future, for $600,000. Refurbishing the plant would cost $500,000. This investment would be depreciated Sor tax purposes on the 10 year MACRS Sheetbend's Pleasantboro land and plant for $1.5 million in cash Should Mr. Tar recommend submitting the hid to the navy at the pruposed price of $30 per yard? The discount rate for this project is 12%. TABLE 9.4 Forecast income statement for the US. Navy duffel canvas project (dellar values in thousands, except price Year 100.00 100.00 1C0.00 3000 30.00 2. Price per yard 3.000.00 3.000,00 3.000.00 3.000,00 3,000.00 2.10000 2,184.00 2271.36 2,362.21 2456.70 5. Operating cash faw (3-4) 900.00 816.00 728.4 637.79 543.30 250.00250.00 65000 566.00 8, Tax at 35% 22750 198.10 167.52 135.72 102.65 5422.50 $367.90 $311.12 $252.07 $190.65 3 Net income (7- 8) 1. Yards sold and price per yard would be faed by conract 2. Cost of goods Includes teed cost of s300,000 per year plus variable costs of $18 per yard. Costs ane expected to 3. Depredadon: A S! mason m esment in machinery is depreceted stragrnine over 5 yeers 00000 per year!" The sscocco cost of sefurbishing the Pleasartbono plant is deprecianed srihHne ever 10 years ($50000 per yearl
