Demand Probability Price/Unit Units Sold/Year Weak 20% $1,450 42K Average 50% $1,500 41K Strong 30% $1,550 40K
Additional project data, outlined in Table 2 below, is used to calculate the Annual Operating Cash Flow for each scenario:
Obama, B. (2009). Remarks by the president on energy. Retrieved from http://www.whitehouse.gov/the_press_office/Remarksby-the-President-on-Energy/ 2 Max, S. (2010). 5 things you need to know about…energy rebates. Money, 39(6). p.3. 3 Energy Star Overview of 2010 Achievements. (2011). Retrieved from http://www.energystar.gov/ia/partners/publications/pubdocs/2010%20CPPD%204pgr.pdf?1e82-578b 4 Rowan, E.G. (2012). Tesca Works. Case Study for BUS-635. University of LaVerne, p.1-4.
Table 2: Annual Operating Cash Flow Summary
Data Name Annual Revenue Labor @ $250/unit Parts @ $300/unit Selling General & Administrative Compressor Cost (MC-004) @ $275/unit Compressor Warranty @ $156/unit Refrigerator Warranty @ $274/unit Depreciation Expense Taxes Net Loss / Income Annual Operating Cash Flow Note Price x Units Weak $60.9M -$10.5M -$12.6M Demand Scenarios Average $61.5M -$10.25M -$12.3M -$8M See Question 4 for details on compressor selection. Per Unit Cost = NPV of $40 over 5 years Per Unit Cost = NPV of $70 over 5 years $11M x 20 years (Straight Line) Marginal Tax Rate = 40% With Depreciation AddedBack -$11.5M -$6.55M -$11.51M -$11.28M -$6.40M -$11.23M -$550K $0 (because EBIT < $0) -$360K $190K -$598K $897K $1.45M -$1.3M $1.95M $2.5M 4
Strong $62M -$10M -$12M
-$11M -$6.24M -$10.96M
Note: All calculations above begin in Year 3, when actual production and selling of the product occurs.
In order to calculate Total Cash Flow per year, we need to combine a) the total amount of initial investment costs4 slated from Year 0 to Year 3 along with b) the amount of Annual Operating Cash Flow for the entire length of the project. Furthermore, Tesca needs to allocate funds (equivalent to 8% of annual revenue*) to Net Working Capital (NWC) in Year 2 so that the manufacturing of the refrigerators can begin in Year 3. In each scenario, NWC was recovered at the end of the...