Consultant for Medicals Inc., Manufacturer

Medicals Inc.

Consultant for Medicals Inc., Manufacturer for $14 Only (Instant Download)

CASE 1

You have been hired as a consultant for Medicals Inc., manufacturer of medical devices. The company projects unit sales for a new dental implant as follows:

Year                       Unit Sales

1                             73,000

2                              86,000

3                              97,000

4                              68,000       

  • Production of the implants will require $1,500,000 in net working capital immediately, all of which will be recovered at the end of the project.
  • Total fixed costs are $4,200,000 per year, variable production costs are $255 per unit, and the units are priced at $375 each.
  • The equipment needed to begin production has an installed cost of $8,500,000. This equipment qualifies as three-year MACRS property (depreciation rates are 33.33% for Year 1, 44.45% for Year 2, 14.81% for Year 3, and 7.41% for Year 4).
  • In four years, this equipment can be sold for about 20 percent of its acquisition cost.
  • The tax rate is 21 percent and the required return is 24 percent.
  • The company imposes a payback cutoff of three years for its investment projects.

QUESTIONS:

  1. Complete the pro forma and determine total cash flows for each year of project’s life.

Understanding the case and the process 10 points, finding the right cash flow 10 points (2 per year)

  • Calculate the following investment criteria for the project:

(a) Payback period (5 points) (2.5 for the right formula/approach and 2.5 for the right result)

(b) Profitability Index (PI) (5 points) (2.5 for the right formula/approach and 2.5 for the right result)

(c) Internal rate of return (IRR) (5 points) (2.5 for the right formula/approach and 2.5 for the right result)

(d) Net Present Value (NPV) (5 points) (2.5 for the right formula/approach and 2.5 for the right result)

  • Explain your decision whether you recommend accepting or rejecting the project. (10 points) (3 points for the right answer and 7 points for the explanation)
Year 0 1 2 3 4
Sales revenues          
Variable Costs          
Fixed Costs          
Depreciation          
EBIT          
Taxes          
Net income          
Operating Cash Flow          
Capital spending          
Net Working Capital          
After-tax salvage value          
Total Cash Flow          

Sample Answer:

Unit Sales                73,000                  86,000                 97,000                 68,000
Year01234
Sales revenues (@375 per unit)             (1,500,000)       27,375,000        32,250,000         36,375,000         25,500,000
Variable Costs (@ $255 per unit)                               –         18,615,000        21,930,000         24,735,000         17,340,000
Fixed Costs                               –           4,200,000           4,200,000           4,200,000           4,200,000
Depreciation (from row no. 15)                               –           2,833,050           2,518,959               466,217               198,719
EBIT (1-2-3-4)                               –           1,726,950           3,601,041           6,973,783           3,761,281
Taxes (value of row 5 × 21%)                               –               362,660              756,219           1,464,494               789,869
Net income (5-6)                               –           1,364,291           2,844,822           5,509,288           2,971,412

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