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Case Study Two Sheetbend and Halyard Case Instructions: Please complete the following the case study. Once you have completed the case study, answer...

1. Project the cash flows for the navy duffel canvas project

for years 0 through 5.


 2. What is the net present value of the navy duffel canvas

project? What is the IRR of the project? Based on the

assumptions that have been made, should S&H accept

the project?


3. Perform some sensitivity analysis on your projections.

Which assumptions concern you the most? Are there

any reasonable changes in assumptions that would make

you change your mind about whether or not to accept

the project?


Excel sheet with numerical answers attached below just need formally written answers to the questions 1- 3.



67 Case Study Two Sheetbend and Halyard Case Instructions: Please complete the following the case study. A spread- sheet has been provided to help you with the calculations. Once you have completed the case study, answer the questions about the case study, the questions are found in the “Case Study Two Questions” section of the course. After answering the questions, submit your spread- sheet to Independent study. For information on submitting the excel sheet to Independent Study, please see the syllabus. Please put your name on the excel sheet before submitting it. Case Study Two Instructions Case Study Two Spreadsheet Sheetbend & Halyard Case Jack Tar, CFO of Sheetbend & Halyard, Inc., opened the company’s confdential envelope. It contained a draFt oF a competitive bid For a con - tract to supply duFFel canvas to the US Navy. The cover memo From the Sheetbend’s CEO asked Mr. Tar to review the bid beFore it was submitted. The bid and its supporting documents had been prepared by Sheetbend’s sales staff. It called for Sheetbend to supply 100,000 yards
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68 of duffel canvas per year for Fve years. The proposed selling price was Fxed at $30 per yard. Mr. Tar was not usually involved in sales, but this bid was unusual in at least two respects. ±irst, if accepted by the navy, the bid would commit Sheetbend to a Fxed-price, long-term contract. Second, producing the duffel canvas would require and investment of $1.5 million to purchase machinery to refurbish Sheetbend’s plant in Pleasantboro, Maine. Mr. Tar set to work and by the end of the week he had collected the following facts and assumptions: The plant in Pleasantboro had been built in the early 1900s and is now idle. The plant was fully depreciated on Sheetbend’s books, except for the $10,000 purchase cost of the land (in 1947). Because the land was valuable shorefront property, Mr. Tar 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 for tax purposes on the ten-year MACRS schedule. The new machinery would cost $1 million. This investment could be depreciated on the Fve-year MACRS schedule. The refurbished plant and new machinery would last for many years.; however, the remaining market for duffel canvas was small, and it was not clear that additional orders could be obtained once the navy contract was Fnished. The machinery was custom-built and could only be used for duffel canvas. Its second-hand value at the end of Fve years was probably zero. Table 1-1 shows the sales staff’s forecast and decided that its assumptions were reasonable, except that the forecast used book, not tax, depreciation. The forecast income statement contained no mention of working capital, but Mr. Tar thought that working capital would average about ten percent of sales. Armed with this information, Mr. Tar constructed a spreadsheet to calculate the NPV of the duffel canvas project, assuming that Sheetbend’s bid would be accepted by the navy. He had just Fnished debugging the spreadsheet when another conF - dential envelope arrived from Sheetbend’s CEO. It contained a Frm offer
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(in thousands of $) 0 1 2 3 4 5 Assumptions Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% MACRS 10-year 10.0% 18.0% 14.4% 11.5% 9.2% MACRS 5-year 20.0% 32.0% 19.2% 11.5% 11.5% Discount rate 12.0% Inflation rate for COGS 4.0% Resale values Land (Estimated sales price) $1,239,250 $496,750 Plant refurbishment $0 Machinery $0 Balance Sheet Items Net Working Capital ($30,000) $0 $0 $0 $0 $30,000 Net PP&E Book value, land $10,000 Book value, plant refurbishment $500,000 Book value, machinery $1,000,000 Cash Flow Forecasts Sales Revenue $3,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000 COGS $2,100,000 $2,184,000 $2,271,360 $2,362,210 $2,456,700 Depreciation, plant refurbishment $50,000 $90,000 $72,000 $57,500 $46,000 Depreciation, machinery $200,000 $320,000 $192,000 $115,000 $115,000 Operating Profit (EBIT) $650,000 $406,000 $464,640 $465,290 $382,300 Taxes $227,500 $142,100 $162,624 $162,852 $133,805 Net Profit (EBIT(1-t)) $422,500 $263,900 $302,016 $302,439 $248,495 Investment in PP&E (CAPX) Land (opportunity cost) Plant refurbishment $500,000 Machinery $1,000,000 Total investment in PP&E (CAPX) ($1,500,000) Sale of PP&E (Terminal value) Land $496,750 Plant $0 Machinery $0 Total terminal value from PP&E $496,750 Investment in Working Capital (ΔNWC) ($30,000) $30,000 Cash Flows ($1,530,000) $672,500 $673,900 $566,016 $474,939 $936,245 Net Present Value $843,637 IRR 32.1% Will accept the project Sensitivity Analysis 1. Inflation - 8% (in thousands of $) 0 1 2 3 4 5 Assumptions Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% MACRS 10-year 10.0% 18.0% 14.4% 11.5% 9.2% MACRS 5-year 20.0% 32.0% 19.2% 11.5% 11.5% A B C D E F G 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61
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Recovery Period Class Year 3 5 7 10 15 20 1 0.333 0.200 0.143 0.100 0.050 0.038 2 0.445 0.320 0.245 0.180 0.095 0.072 3 0.148 0.192 0.175 0.144 0.086 0.067 4 0.074 0.115 0.125 0.115 0.077 0.062 5 0.000 0.115 0.089 0.092 0.069 0.057 6 0.000 0.058 0.089 0.074 0.062 0.053 7 0.000 0.000 0.089 0.066 0.059 0.049 8 0.000 0.000 0.045 0.066 0.059 0.045 9 0.000 0.000 0.000 0.066 0.059 0.045 10 0.000 0.000 0.000 0.066 0.059 0.045 11 0.000 0.000 0.000 0.033 0.059 0.045 12 0.000 0.000 0.000 0.000 0.059 0.045 13 0.000 0.000 0.000 0.000 0.059 0.045 14 0.000 0.000 0.000 0.000 0.059 0.045 15 0.000 0.000 0.000 0.000 0.059 0.045 16 0.000 0.000 0.000 0.000 0.030 0.045 17 0.000 0.000 0.000 0.000 0.000 0.045 18 0.000 0.000 0.000 0.000 0.000 0.045 19 0.000 0.000 0.000 0.000 0.000 0.045 20 0.000 0.000 0.000 0.000 0.000 0.045 21 0.000 0.000 0.000 0.000 0.000 0.023
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1. The projected Cash flow for navy duffel project for years 0 to 5 is given as Cash Flow Forecasts Year 0 Sales Revenue
COGS
Depreciation, plant refurbishment
Depreciation, machinery
Operating...

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