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Finance - The Mountain Bike Corporation (MBC) is a subsidiary of the Bicycle Corporation (BC)




Question;1. Description (INTRO)The Mountain Bike Corporation (MBC) is a subsidiary of the Bicycle Corporation (BC).BC manufactures racing bicycles and MBC represents BCs first attempt in the growingmountain bicycle market. Due to the recent push by major cities to encourage the use ofbicycles as an alternative method of transportation, the bicycle industry has recently seena resurgence. BC has been a leader in the industry for 20 years, however its bicycles arerelatively expensive. BC set up MBC to compete with other low cost bicyclemanufacturers without tarnishing its reputation for high-quality bicycles. MBC willproduce bicycles for everyday use and for the weekend enthusiast.2. Sales and Pricing ProjectionsThe project is expected to last 11 years after which BMC will discontinue the All-TerrainMTB bicycle. Projected annual sales and prices are given in the table below.Year Unit Sales Price1100,000$449.992120,000$449.993130,000$449.994140,000$449.995135,000$399.996130,000$399.997130,000$399.998125,000$399.999125,000$369.9910120,000$369.9911115,000$369.993. Cost ProjectionsThe bicycle will require $4,500,000 in net working capital at the start. Subsequently, totalnet working capital at the end of each year will be 30% of sales for that year. Thevariable cost per bicycle is $200, and total fixed costs are $750,000 per year.The bicycle project will incur selling, general, and administrative (SG&A) expensesevery year equivalent to 8 percent of sales. MBC is planning a very aggressive marketingcampaign in all major cities.The bicycle will require an initial investment in industrial equipment of $7 million. Theindustrial equipment will be sold at the end of the eleventh year for about 10% of its cost.MBC will also acquire a new computer network system to control quality, process orders,and improve communications with customers. It will also help CMC to monitor thecompanys operations more effectively. The cost of the computer system will be $2million including installation. MBC will also purchase $1 million worth of new furniture,racks, and shelves to furnish and equip its stores throughout the country. MBC will notsell the computer network system and the furniture at the end of the eleventh year since itmay use them for future projects.Since the industrial equipment is primarily production machinery, it qualifies as ten-yearMACRS property. The computer network system qualifies as five-year MACRSproperty. The furniture qualifies as seven-year MACRS property. The marginal tax rateof the company is 30%. Your book has the MACRS percentages in chapter 9.The equipment will be installed in an empty warehouse the BC acquired 7 years ago. Atthe time, BC paid $250,000 for the warehouse.5. Based on this information should MBC proceed?a. Calculate the breakeven point.b. Estimate the pro forma income statements and the projects cash flows: OCF,Changes in NWC, Changes in FA, and FCF. THIS PART OF THE EXAMMUST BE COMPLETED IN EXCEL.c. Calculate NPV (in Excel) and explain why the firm should accept or reject theproject.d. Calculate IRR (in Excel) and explain why the firm should accept or reject theproject.e. Calculate the PI (in Excel) and explain why the firm should accept or theprojectOTHER INFO (I DONT KNOW IF YOU WILL NEED IT)Cost of Capitalrice of94. These bonds pay interest quarterly.dividend of $2.5 next year. The dividend is expected to grow by 4.5 percent per yearindefinitely. The beta of the stock is 1.5.dividend of $1.5 per share.percent, and the risk-free rate is 2 percent.MACRS %


Paper#48178 | Written in 18-Jul-2015

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