APP - Team 19 Iven Peng (996824842) Xiaoyu Sun (996887052)...

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Unformatted text preview: Team 19 Iven Peng (996824842) Xiaoyu Sun (996887052) Yutong Zhang (996533021) Chen Zhao (999999999) PLEASURE CRAFT INC. Date: 01/12/2010 To: Ms. Jane Meadows, Vice-President of Operations From: Team 19 Ivan Peng, Yolanda Sun, Elton Zhang, and Cheng Zhao Subject: Evaluation of Expansion Projects into Front-end Loaders and Outboard Motors With the market for snowmobiles and personal watercraft (PW) maturing, Pleasure Craft (PC) is considering the expansion into production of either outboard motors or front-end loaders. Both expansion projects have been thoroughly evaluated using the most accurate information and estimates currently available. The net present value (NPV) approach was taken, as per company policy, and in addition, the internal rate of revenue (IRR) was also calculated for each project. The following table presents the important financial parameters for the two projects: Project 1: Front-End Loaders Project 2: Outboard Motors Life Span 15 years 20 years NPV $25,816,338.57 $45,215,932.09 Initial Cost $17,000,000.00 $14,950,000.00 IRR (Yearly) 34.026% 36.03% WACC (Yearly) 11.11% 10.27% Time til Stop Debt Financing Year 6, Quarter 3 Year 1, Quarter 3 Refer to the appendix for full computations and cash flow diagrams for the projects. Some of the most important assumptions used to derive these figures are:- PC has the market power to raise prices by the inflation rate each year.- PC finances all shortage of cash through bank loan.- The amount borrowed each quarter equals to Cash Before Bank Loan - Sales/6.- PC pays loan interest on a quarterly basis, with the interest rate equal to the companys bond rate.- All excessive cash are subject to withdrawal to meet the companys cash requirement. Based on the figures from the table, it appears that both projects are rather similar in many aspects. However, team 19 has reached the consensus that the Outboard Motors project is financially superior. The comparison of the NPV is not fully justifiable in this case as the two projects have different life span. The WACCs and IRRs are too similar to differentiate. However, the Outboard Motor requires significantly smaller initial cost, easing the companys budget plan by over 2 million dollars. Moreover, the Outboard Motors project no longer relies on debt financing after Year 1 Quarter 3, in contrast to Year 6 Quarter 3 for the Front-End Loader. Project 1, the expansion into manufacturing of small, front-end loaders, would be a move into new and risky industry, as the market is cyclical and subject to intense foreign competitions. As a result, it would raise the current cost of capital for PC. The primary target consumer would be construction companies, farmers and ranchers, the military and municipal governments. It would draw upon PCs strengths in small-engine manufacturing, but would require the establishment of a new selling network....
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APP - Team 19 Iven Peng (996824842) Xiaoyu Sun (996887052)...

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