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Lincoln Machine Equipment Corp. (?LMEC?) designs,...




Lincoln Machine Equipment Corp. (?LMEC?) designs, machines and markets a variety of steel components for industrial machinery and systems. The company is evaluating the expansion of its production plant to enable it to expand its sales capacity for the next 5 years. Last year, the company spent $67,000 to do marketing research analysis to estimate market demand for new markets. The current expansion scenario would have total construction costs of $2.4 million and it would take about 82 days to complete (i.e., essentially up-front). LMEC would also put in $725 thousand of new machinery and equipment. Inventory (raw materials, work-in-process, finished goods) investment needed for the expansion to get started would be $314 thousand. Except for the inventory investment, the total upfront investment can be depreciated using the straight-line method over four years. The company expects to incur $275 thousand in incremental annual interest expense, and the company expects it could increase annual dividends $0.03 per share (there are 800,000 shares outstanding). Incremental sales for this project are based on forecast demand of 2,200 units in the first year, 2,840 units in the second year, 3,180 units in the third year, 3,530 units in the fourth year, and 1,200 units in the fifth year, with an average selling price of $1,750.00 per unit. Cost of goods sold is estimated to be 70% of total sales each year, and incremental fixed costs are estimated to be $125,000 per year. At the end of the project?s estimated life, the company estimates it could sell the purchased machinery and equipment for $250,000 and the expected the book value for these items would be zero. Also at the end of the project, $35,000 of inventory could be liquidated at its original cost (with no income tax effect). The company?s income tax rate is expected to be 35% for ordinary income and 15% for capital gains income. If LMEC does this project, it will immediately sell some existing surplus equipment for a price of $675,000 which has a current book value of $360,000 and which has future depreciation of $120 thousand for the next three years. LMEC?s weighted average cost of capital is 10.50%, so it believes this project should earn at least a 13.50% average annual return. Put the solutions to the following questions in an Excel spreadsheet with appropriate detail. 1. What is the upfront total after-tax cash costs for this proposed project? 2. What are the Total Annual Free Cash Flows for Year 1? Year 2? Year 3? 3. What is the Total After-Tax Operating Cash Flow for Year 5 (exclude Terminal Year-specific items)? 4. What is Terminal Year-specific Cash Flow (i.e., After-Tax Salvage Value excluding the Annual Operating Cash Flow portion)? Show your work in appropriate detail. 5. Is(Are) there any irrelevant cash flow(s) mentioned in this problem? If so, what is(are) it(they)? 6. Are there any sunk costs for this project? If so, what are they? 7. Are there any opportunity costs for this project? If so, what are they? 8. What is the Net Present Value for this project proposal? 9. What is the Internal Rate of Return for this project proposal? 10. Would this project be a good investment? Why?,thank you, if possible please show formulas and/or work from following spreadsheet,Is it coming along ok?


Paper#3774 | Written in 18-Jul-2015

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