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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 wasunique products in the midst of economic adversity. With current year revenues conshrinking due to severe price competition, the firm’s engineers had been pushed reauseful, and hopefully, highly profitable “unique” product. Then, last month, the desigprototype of their latest innovation, the “remote-controlled” lawn mower, nick-namedSurveys of retailers and customers, conducted by the marketing department, indexcellent, provided the price was lower than a riding lawn mower. The testing and dyears and the final product passed all safety hazard tests with flying colors. After theexhibited at various home shows nationwide and received raving reviews. Full produbecause there had been a change in CEOs and the new CEO was highly conservatBefore being given the “go ahead” to go into full-scale production of the Lazy Mopresent a detailed feasibility study to the Capital Investment Committee (CIC), whichof Finance, Pete Fieldstone. As was typical in a major undertaking of this type, the pand revenue estimates with sufficient documentation to substantiate the numbers.Having been involved with more than a few of these kinds of proposals before, tConklin, knew that he had better take every possible factor into consideration and bdemanding question and answer session at the next committee meeting. Luckily forwho had recently earned his Chartered Financial Analyst (CFA) designation, was anemployee. Prior to being hired by CPC three years ago, Ron had worked for anotheover 10 years. “Ron, we have to dot all the “i’s” and cross all the “t’s” on this one!” sagoing to tear us apart, coz we’re talking major dollars here. So Dan and Ron began collecting the necessary information. They knew that to havthey would have to include the following:1. Pro Forma statements showing expected annual revenues, variable costs,. fixover 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 profiQuestions: Q1: Prepare a Pro Forma Statement showing the annual cash flows resulting from tQ2: 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 shoureport? Which variables or inputs are obvious ones that need to be analyzed using mperforming 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 breInterpret each one. Q6: Let’s say that the company had spent $500,000 in developing the prototype of tand Ron treat this item in their report? Please explain.Q7: Calculate the IRR of the project. Based on your calculations what would you recQ8: How sensitive is the Net Present Value of the project to the cost of capital?

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