Case 3 Group - CSW.xlsx - Case 3 Estimating Cash Flow a New...

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Case 3 Estimating Cash Flow a New Project Analysis The Lazy Mower; Is It Really Worth It? If there was one thing the folks at Innovative Products Inc. (IN) knew well, it was unique products in the midst of economic adversity. With current year revenues con shrinking due to severe price competition, the firm’s engineers had been pushed rea useful, and hopefully, highly profitable “unique” product. Then, last month, the desig prototype of their latest innovation, the “remote-controlled” lawn mower, nick-named Surveys of retailers and customers, conducted by the marketing department, ind excellent, provided the price was lower than a riding lawn mower. The testing and d years and the final product passed all safety hazard tests with flying colors. After the exhibited at various home shows nationwide and received raving reviews. Full produ because there had been a change in CEOs and the new CEO was highly conservat Before being given the “go ahead” to go into full-scale production of the Lazy Mo present a detailed feasibility study to the Capital Investment Committee (CIC), which of Finance, Pete Fieldstone. As was typical in a major undertaking of this type, the p and revenue estimates with sufficient documentation to substantiate the numbers. Having been involved with more than a few of these kinds of proposals before, t Conklin, knew that he had better take every possible factor into consideration and b demanding question and answer session at the next committee meeting. Luckily for who had recently earned his Chartered Financial Analyst (CFA) designation, was an employee. Prior to being hired by CPC three years ago, Ron had worked for anothe over 10 years. “Ron, we have to dot all the “i’s” and cross all the “t’s” on this one!” sa going to tear us apart, coz we’re talking major dollars here. So Dan and Ron began collecting the necessary information. They knew that to hav they would have to include the following: 1. Pro Forma statements showing expected annual revenues, variable costs,. fix over the economic life of the project with appropriate supporting documentation; 2. Break-Even Analysis; 3. Sensitivity of the cash flows to alternative scenarios of sales growth and profi Questions: Q1: Prepare a Pro Forma Statement showing the annual cash flows resulting from t Q2: Use a scenario analysis to show how the cash flows would change if the sales f (Pessimistic) and 15% better (Optimistic) than the stated forecast (Base). Q3: Realizing that the CIC will demand some kind of sensitivity analyses, how shou report? Which variables or inputs are obvious ones that need to be analyzed using m performing suitable calculations. Q4: How should the annual interest expenses of $400,000 be treated? Explain. Q5: Using the base case estimates calculate the cash, accounting, and financial bre Interpret each one. Q6: Let’s say that the company had spent $500,000 in developing the prototype of t and Ron treat this item in their report? Please explain. Q7: Calculate the IRR of the project. Based on your calculations what would you rec

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