Lazy Mower
Solution to Case 03
Cash Flow Analysis
The Lazy Mower: Is it really worth it?
Questions:
1. Prepare a Pro Forma Statement showing the annual cash flows resulting from the Lazy Mower project.
(See table on next page)
2. Use a scenario analysis to show how the cash flows would change if the sales forecasts were 15% worse (Pessimistic) and 15% better (Optimistic) than the stated forecast (base).
3. Realizing that the CIC will demand some kind of sensitivity analyses, how should Dave and Rick prepare their report? Which variables or inputs are obvious ones that need to be analyzed using multiple values? Explain by performing suitable calculations.
The variables that are vulnerable to economic and market factors such as competition, inflation, and recession are selling price per unit and variable cost per unit. To some extent fixed costs can be sensitive as well. Price per unit has been adjusted over the years to allow for downward trends due to competitive pressure. However, cost sensitivity needs to be analyzed. Variable cost per unit can be increased by 10% up to 30% and the impact on cash flows and Net Present Value and IRR can be analyzed.
4. How should the interest expenses be treated? Explain.
The interest expense should not be deducted when calculating the annual cash flows. Interest is a financing expense and is included in the discount rate (cost of capital) used to calculate the NPV. If we deduct interest expenses we will be double counting.
5. Using the base case estimates calculate the cash, accounting, and financial breakeven of the Lazy Mower project. Interpret each one.
Price per unit = $1000 (upto 102,000 units)
Variable cost per unit = $400
Annual Fixed Operating Cost = $1,620,000 (includes opportunity cost of rent)
Depreciation = 2,000,000 (assuming straight line depreciation over 10 years)
Accounting Break-Even = (Fixed Cost + Depreciation)/(Price –
Cash Flow Analysis
The Lazy Mower: Is it really worth it?
Questions:
1. Prepare a Pro Forma Statement showing the annual cash flows resulting from the Lazy Mower project.
(See table on next page)
2. Use a scenario analysis to show how the cash flows would change if the sales forecasts were 15% worse (Pessimistic) and 15% better (Optimistic) than the stated forecast (base).
3. Realizing that the CIC will demand some kind of sensitivity analyses, how should Dave and Rick prepare their report? Which variables or inputs are obvious ones that need to be analyzed using multiple values? Explain by performing suitable calculations.
The variables that are vulnerable to economic and market factors such as competition, inflation, and recession are selling price per unit and variable cost per unit. To some extent fixed costs can be sensitive as well. Price per unit has been adjusted over the years to allow for downward trends due to competitive pressure. However, cost sensitivity needs to be analyzed. Variable cost per unit can be increased by 10% up to 30% and the impact on cash flows and Net Present Value and IRR can be analyzed.
4. How should the interest expenses be treated? Explain.
The interest expense should not be deducted when calculating the annual cash flows. Interest is a financing expense and is included in the discount rate (cost of capital) used to calculate the NPV. If we deduct interest expenses we will be double counting.
5. Using the base case estimates calculate the cash, accounting, and financial breakeven of the Lazy Mower project. Interpret each one.
Price per unit = $1000 (upto 102,000 units)
Variable cost per unit = $400
Annual Fixed Operating Cost = $1,620,000 (includes opportunity cost of rent)
Depreciation = 2,000,000 (assuming straight line depreciation over 10 years)
Accounting Break-Even = (Fixed Cost + Depreciation)/(Price –