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  • IOW Casting Company NPV Excel Solution

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    alka murarka
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    Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. The new production line would be set up in unused space in IOW's main plant. The machinery invoice price totals approximately $250,000, with another $20,000 in shipping charges and $30,000 to install the equipment, for a total requirement estimated at $300,000. The machinery has an economic life of 4 years, and IOW has obtained a special tax ruling that places the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year class. After 4 years of use the machinery is expected to have a salvage value of $25,000. The new product line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 each in the first year. The sales price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to 15% of sales revenues. The firm's tax rate is 40%, and its overall weighted average cost of capital is 12%. Assume that Sydney Johnson is confident of her estimates of all the variables that affect the project's cash flowsexceptunit sales and sales price. If product acceptance is poor, unit sales could be only approximately 1,000 units a year and the unit price would be set at $150. Conversely, an excellent consumer response could produce sales of 2,000 units and a unit price of $220. Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case). What is the worst-case NPV? The best-case NPV? Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the project's expected NPV, standard deviation, and coefficient of variation. Assume that IOW's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new product line be classified as high risk, average risk, or low risk? What type of risk is being measured here? IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust for risk. Given this consideration, should the new line be accepted? Explain. Describe other subjective risk factors that should be considered before the final decision is made, and their individual impact on the project.

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    Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. The new production line would be set up in unused space in IOW's main plant. The machinery invoice price totals approximately $250,000, with another $20,000 in shipping charges and $30,000 to install the equipment, for a total requirement estimated at $300,000. The machinery has an economic life of 4 years, and IOW has obtained a special tax ruling that places the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year class. After 4 years of use the machinery is expected to have a salvage value of $25,000. The new product line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 each in the first year. The sales price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to 15% of sales revenues. The firm's tax rate is 40%, and its overall weighted average cost of capital is 12%. Assume that Sydney Johnson is confident of her estimates of all the variables that affect the project's cash flowsexceptunit sales and sales price. If product acceptance is poor, unit sales could be only approximately 1,000 units a year and the unit price would be set at $150. Conversely, an excellent consumer response could produce sales of 2,000 units and a unit price of $220. Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case). What is the worst-case NPV? The best-case NPV? Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the project's expected NPV, standard deviation, and coefficient of variation. Assume that IOW's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new product line be classified as high risk, average risk, or low risk? What type of risk is being measured here? IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust for risk. Given this consideration, should the new line be accepted? Explain. Describe other subjective risk factors that should be considered before the final decision is made, and their individual impact on the project.

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    © All Rights Reserved
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    364 views15 pages

    IOW Casting Company NPV Excel Solution

    Uploaded by

    alka murarka
    Iron Ore What? (IOW) Casting Company is considering adding a new line to its product mix. Sydney Johnson, a recently minted MBA, will be conducting the capital budgeting analysis. The new production line would be set up in unused space in IOW's main plant. The machinery invoice price totals approximately $250,000, with another $20,000 in shipping charges and $30,000 to install the equipment, for a total requirement estimated at $300,000. The machinery has an economic life of 4 years, and IOW has obtained a special tax ruling that places the equipment in the Modified Accelerated Cost Recovery System (MACRS) 3-year class. After 4 years of use the machinery is expected to have a salvage value of $25,000. The new product line would generate incremental sales of 1,350 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 each in the first year. The sales price and cost are expected to increase by 3% per year due to inflation. Further, to handle the new line, the firm's net working capital would have to increase by an amount equal to 15% of sales revenues. The firm's tax rate is 40%, and its overall weighted average cost of capital is 12%. Assume that Sydney Johnson is confident of her estimates of all the variables that affect the project's cash flowsexceptunit sales and sales price. If product acceptance is poor, unit sales could be only approximately 1,000 units a year and the unit price would be set at $150. Conversely, an excellent consumer response could produce sales of 2,000 units and a unit price of $220. Sidney believes that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case). What is the worst-case NPV? The best-case NPV? Use the worst-, base-, and best-case NPVs and probabilities of occurrence to find the project's expected NPV, standard deviation, and coefficient of variation. Assume that IOW's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new product line be classified as high risk, average risk, or low risk? What type of risk is being measured here? IOW typically adds or subtracts 5 percentage points to the overall cost of capital to adjust for risk. Given this consideration, should the new line be accepted? Explain. Describe other subjective risk factors that should be considered before the final decision is made, and their individual impact on the project.

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    For full set of answer, Please mail me at alkamurarkaa@gmail.

    com
    Also for any other projects help please mail me. I can help in any courses Finance, Management, Strategy,
    Marketing, Human Resources, Organization Behavior, Economics, Excel, Dissertation, CAPSIM, Online Test
    and any other kind of projects.
    Capital Cost
    Machine cost $$$$,$$$
    Shipping charges $$$,$$$
    Installation $$$,$$$
    Total Capital Cost $$$$,$$$
    Salvage Value at end of 4 Yrs $$$,$$$

    Depreciation - MACRS 3-Yrs


    Year 1 2 3
    Rate $$.$$% $$.$$% $$.$$%
    Annual depreciation $$$,$$$ $$$$,$$$ $$$,$$$

    Income Model
    Units sold annually $,$$$
    Revenue per unit - Yr 1 $$$$
    Cost per unit - Yr 1 $$$$
    Annual inflation $%
    Net working capital (% of sales) $$%

    Tax Rate $$%


    WACC $$%
    Net Working Capital
    Year 0 1 2
    Revenue $$$$,$$$ $$$$,$$$
    Net Working Capital $$$,$$$ $$$,$$$ $$$,$$$
    CF due to NWC or Incremental
    NWC ($$$,$$$) ($$,$$$) ($$,$$$)

    After-tax salvage value


    Year 4
    Net Book Value $$
    Salvage Value $$$,$$$
    Capital Gain $$$,$$$
    Tax on Capital Gain ($$$,$$$)
    Post-tax salvage value $$$,$$$

    Operating Model
    Year 0 1 2
    Revenue $$$$,$$$ $$$$,$$$
    Less: Operating Cost ($$$$,$$$) ($$$$,$$$)
    EBITDA $$$$,$$$ $$$$,$$$
    Less: Depreciation ($$$,$$$) ($$$$,$$$)
    Operating Profit $$$,$$$ $$,$$$
    Less: Tax ($$$,$$$) ($$,$$$)
    Operating Profit after tax $$$,$$$ $$,$$$
    Add: Depreciation $$$,$$$ $$$$,$$$
    Cash flow from operations $$$$,$$$ $$$$,$$$
    Less: Initial investment ($$$$,$$$)
    Less: Incremental NWC ($$$,$$$) ($$,$$$) ($$,$$$)
    Add: After-tax salvage value
    Add: Recovery of NWC
    Project's Net Free Cash Flow ($$$$,$$$) $$$$,$$$ $$$$,$$$
    Discounted Free Cash Flow ($$$$,$$$) $$$$,$$$ $$$$,$$$

    NPV at 12% $46,939 Remarks


    IRR $$.$% Since the NPV is positive and MIRR is more than WACC, the
    project is profitable and hence should be considered.
    Remarks
    Since the NPV is positive and MIRR is more than WACC, the
    project is profitable and hence should be considered.
    MIRR $$.$%
    Profitability Index (PI) $.$
    Payback period (Years) $.$
    Discounted Payback (Years) $.$

    Sensitivity Analysis

    Unit Sales NPV MIRR


    1350 $$$,$$$ $$.$%
    1485
    1620
    1755
    1215
    1080
    945

    NPV MIRR

    Of the three variables tested above, NPV and MIRR of the project is most sensitive to change in unit sales, moderately sen
    Hence, cautionary measures should be taken if there is any stress observed in units sold and effective measures should be
    steeper than the plots for other two variables and hence units sales is the most critical or sen

    Scenario Analysis
    Scenarios Probability NPV
    Worst $$% ($$$$,$$$)
    Base $$% $$$,$$$
    Best $$% $$$$,$$$

    Expected NPV $$$,$$$


    Standard Deviation $$$$,$$$
    Coefficient of Variation $.$$

    Since the coefficient of variation at 2.19 is much above the range of average
    project COV, the new project possess very high risk.

    Given, risky nature of the project, the risk adjusted WACC would be
    17%. Now the NPV at 17% WACC is $8,421 and MIRR is 17.7%. Since
    NPV is positive and MIRR is still higher than WACC, the project should
    be accepted.
    Given, risky nature of the project, the risk adjusted WACC would be
    17%. Now the NPV at 17% WACC is $8,421 and MIRR is 17.7%. Since
    NPV is positive and MIRR is still higher than WACC, the project should
    be accepted.
    agement, Strategy,
    PSIM, Online Test

    4
    $.$$%
    $$$,$$$
    3 4
    $$$$,$$$ $$$$,$$$
    $$$,$$$ $

    ($$,$$$) $$$,$$$

    3 4
    $$$$,$$$ $$$$,$$$
    ($$$$,$$$) ($$$$,$$$)
    $$$$,$$$ $$$$,$$$
    ($$$,$$$) ($$$,$$$)
    $$$,$$$ $$$$,$$$
    ($$$,$$$) ($$$,$$$)
    $$$,$$$ $$$,$$$
    $$$,$$$ $$$,$$$
    $$$$,$$$ $$$,$$$

    ($$,$$$)
    $$$,$$$
    $$$,$$$
    $$$$,$$$ $$$$,$$$
    $$$,$$$ $$$,$$$

    marks
    MIRR is more than WACC, the
    ence should be considered.
    Salvage Value NPV MIRR WACC NPV MIRR
    $25,000 $$$,$$$ $$.$% 12.0% $$$,$$$ $$.$%
    $27,500 13.2%
    $30,000 14.4%
    $32,500 15.6%
    $22,500 10.8%
    $20,000 9.6%
    $17,500 8.4%

    NPV MIRR
    NPV MIRR

    o change in unit sales, moderately sensitive to change in WACC and is least affected by change in salvage value.
    sold and effective measures should be initiated to restore the lost or declining sales. The plot of unit sales is much
    e units sales is the most critical or sensitive variable in overall project consideration.
    Capital Cost
    Machine cost $$$$,$$$
    Shipping charges $$$,$$$
    Installation $$$,$$$
    Total Capital Cost $$$$,$$$
    Salvage Value at end of 4 Yrs $$$,$$$

    Depreciation - MACRS 3-Yrs


    Year 1 2 3
    Rate $$.$$% $$.$$% $$.$$%
    Annual depreciation $$$,$$$ $$$$,$$$ $$$,$$$

    Income Model
    Units sold annually $,$$$
    Revenue per unit - Yr 1 $$$$
    Cost per unit - Yr 1 $$$$
    Annual inflation $%
    Net working capital (% of sales) $$%

    Tax Rate $$%


    WACC $$%

    Net Working Capital


    Year 0 1 2
    Revenue $$$$,$$$ $$$$,$$$
    Net Working Capital $$$,$$$ $$$,$$$ $$$,$$$
    CF due to NWC or Incremental
    NWC ($$$,$$$) ($$$$) ($$$$)

    After-tax salvage value


    Year $
    Net Book Value $$
    Salvage Value $$$,$$$
    Capital Gain $$$,$$$
    Tax on Capital Gain ($$$,$$$)
    Post-tax salvage value $$$,$$$

    Operating Model
    Year 0 1 2
    Revenue $$$$,$$$ $$$$,$$$
    Less: Operating Cost ($$$$,$$$) ($$$$,$$$)
    EBITDA $$$,$$$ $$$,$$$
    Less: Depreciation ($$$,$$$) ($$$$,$$$)
    Operating Profit ($$$,$$$) ($$$,$$$)
    Less: Tax $$$,$$$ $$$,$$$
    Operating Profit after tax ($$$,$$$) ($$$,$$$)
    Add: Depreciation $$$,$$$ $$$$,$$$
    Cash flow from operations $$$,$$$ $$$,$$$
    Less: Initial investment ($$$$,$$$)
    Less: Incremental NWC ($$$,$$$) ($$$$) ($$$$)
    Add: After-tax salvage value
    Add: Recovery of NWC
    Project's Net Free Cash Flow ($$$$,$$$) $$$,$$$ $$$,$$$
    Discounted Free Cash Flow ($$$$,$$$) $$$,$$$ $$$,$$$

    NPV at 12% ($$$$,$$$)


    IRR -$.$%
    MIRR $.$%
    Profitability Index (PI) $.$
    Payback period (Years) ($.$)
    Discounted Payback (Years) $.$

    Sensitivity Analysis

    Unit Sales NPV MIRR


    1000 ($$$$,$$$) $.$%
    1100
    1200
    1300
    900
    800
    700

    NPV MIRR
    4
    $.$$%
    $$$,$$$

    3 4
    $$$$,$$$ $$$$,$$$
    $$$,$$$ $

    ($$$$) $$$,$$$

    3 4
    $$$$,$$$ $$$$,$$$
    ($$$$,$$$) ($$$$,$$$)
    $$$,$$$ $$$,$$$
    ($$$,$$$) ($$$,$$$)
    $$,$$$ $$$,$$$
    ($$,$$$) ($$$,$$$)
    $$,$$$ $$$,$$$
    $$$,$$$ $$$,$$$
    $$$,$$$ $$$,$$$

    ($$$$)
    $$$,$$$
    $$$,$$$
    $$$,$$$ $$$,$$$
    $$$,$$$ $$$,$$$

    Salvage Value NPV MIRR WACC NPV MIRR


    $25,000 ($$$$,$$$) $.$% 12.0% ($$$$,$$$) $.$%
    $27,500 13.2%
    $30,000 14.4%
    $32,500 15.6%
    $22,500 10.8%
    $20,000 9.6%
    $17,500 8.4%

    NPV MIRR
    N PV MIRR
    Capital Cost
    Machine cost $$$$,$$$
    Shipping charges $$$,$$$
    Installation $$$,$$$
    Total Capital Cost $$$$,$$$
    Salvage Value at end of 4 Yrs $$$,$$$

    Depreciation - MACRS 3-Yrs


    Year 1 2 3
    Rate $$.$$% $$.$$% $$.$$%
    Annual depreciation $$$,$$$ $$$$,$$$ $$$,$$$

    Income Model
    Units sold annually $,$$$
    Revenue per unit - Yr 1 $$$$
    Cost per unit - Yr 1 $$$$
    Annual inflation $%
    Net working capital (% of sales) $$%

    Tax Rate $$%


    WACC $$%

    Net Working Capital


    Year 0 1 2
    Revenue $$$$,$$$ $$$$,$$$
    Net Working Capital $$$,$$$ $$$,$$$ $$$,$$$
    CF due to NWC or Incremental
    NWC ($$$,$$$) ($$,$$$) ($$,$$$)

    After-tax salvage value


    Year 4
    Net Book Value $$
    Salvage Value $$$,$$$
    Capital Gain $$$,$$$
    Tax on Capital Gain ($$$,$$$)
    Post-tax salvage value $$$,$$$

    Operating Model
    Year 0 1 2
    Revenue $$$$,$$$ $$$$,$$$
    Less: Operating Cost ($$$$,$$$) ($$$$,$$$)
    EBITDA $$$$,$$$ $$$$,$$$
    Less: Depreciation ($$$,$$$) ($$$$,$$$)
    Operating Profit $$$$,$$$ $$$$,$$$
    Less: Tax ($$$,$$$) ($$$,$$$)
    Operating Profit after tax $$$,$$$ $$$,$$$
    Add: Depreciation $$$,$$$ $$$$,$$$
    Cash flow from operations $$$$,$$$ $$$$,$$$
    Less: Initial investment ($$$$,$$$)
    Less: Incremental NWC ($$$,$$$) ($$,$$$) ($$,$$$)
    Add: After-tax salvage value
    Add: Recovery of NWC
    Project's Net Free Cash Flow ($$$$,$$$) $$$$,$$$ $$$$,$$$
    Discounted Free Cash Flow ($$$$,$$$) $$$$,$$$ $$$$,$$$

    NPV at 12% $$$$,$$$


    IRR $$.$%
    MIRR $$.$%
    Profitability Index (PI) $.$
    Payback period (Years) $.$
    Discounted Payback (Years) $.$

    Sensitivity Analysis

    Unit Sales NPV MIRR


    2000 $$$$,$$$ $$.$%
    2200
    2400
    2600
    1800
    1600
    1400

    NPV MIRR
    4
    $.$$%
    $$$,$$$

    3 4
    $$$$,$$$ $$$$,$$$
    $$$,$$$ $

    ($$,$$$) $$$,$$$

    3 4
    $$$$,$$$ $$$$,$$$
    ($$$$,$$$) ($$$$,$$$)
    $$$$,$$$ $$$$,$$$
    ($$$,$$$) ($$$,$$$)
    $$$$,$$$ $$$$,$$$
    ($$$,$$$) ($$$,$$$)
    $$$$,$$$ $$$$,$$$
    $$$,$$$ $$$,$$$
    $$$$,$$$ $$$$,$$$

    ($$,$$$)
    $$$,$$$
    $$$,$$$
    $$$$,$$$ $$$$,$$$
    $$$$,$$$ $$$$,$$$

    Salvage Value NPV MIRR WACC NPV MIRR


    $25,000 $$$$,$$$ $$.$% 12.0% $$$$,$$$ $$.$%
    $27,500 13.2%
    $30,000 14.4%
    $32,500 15.6%
    $22,500 10.8%
    $20,000 9.6%
    $17,500 8.4%

    NPV MIRR
    N PV MIR R

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