Stockbridge Sprockets, Inc. (hereinafter referred to as the “company”), has had a surge in orders that they believe will continue into the foreseeable future, and if so will likely necessitate...

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Stockbridge Sprockets, Inc. (hereinafter referred to as the “company”), has had a surge in orders that they believe will continue into the foreseeable future, and if so will likely necessitate building or buying a new factory to keep up with product orders. They have decided to do an analysis on potentially building a factory on a tract of land they currently own near Mason. They have hired you to complete this analysis and make a recommendation.

To perform the necessary analysis, you have compiled the following data:

  • The project has a 5 year timeline.
  • The company purchased the land in Mason that the factory would be built on for $10,000,000. The purchase was made in 2007.
  • The factory site will require $1,000,000 in infrastructure improvements should they decide to build the factory on that site.
  • The company has performed Research and Development on the products that the factory would build over the past year in the amount of $500,000.
  • The cost of building and equipping the factory is estimated at $28,000,000.
  • The Marketing Department of the company has spent $250,000 over the past year to try to increase demand in the company’s products.
  • Both the factory and its equipment would be depreciated straight-line to $0 over their estimated7-yearuseful life.
  • A residential property developer has offered the company $10,000,000 for the site should they not decide to build the factory on it.
  • If the company decides to build the factory, they will sell a factory that they own that has been closed for several years located Portland, MI. Mid-Michigan Manufacturing has made an offer to purchase the closed facility for $1,265,823. This transaction would take place immediately at the beginning of the project (Year 0).
  • A competitor, Williamston Widgets, Inc., has told the company that they will buy the new factory and all of its equipment for $5,000,000 at the end of the project (the end of Year 5).
  • Products produced by the factory will add an estimated $45,500,000 to the company’s revenue in Year 1.
  • Sales growth in Years 2 & 3 is expected to be 4.5% per year.
  • As the market begins to become saturated, sales are expected to decline in Years 4 & 5 by 5% per year.
  • Total Costs (Expenses) are estimated to be 76% of sales.
  • Additional Net Working Capital will be required in Year 0 of $500,000, 30% of which will be recovered in the project’s terminal year.
  • The company’s tax rate is 21%.
  • The required rate of return on the project is 10.0%.

Part 1 – Base Case:

Using the above data, complete the DCF Model in Excel posted on Connect. Compute the Base Case’s NPV and IRR. Then copy the Base Case worksheet and post to the tabs marked Part 2, Part 3, and Part 4. A consulting firm as suggested a few alternate scenarios based on their analysis, and has computed their estimate of the likelihood of each scenario occurring. They have also estimated that the Base Case has a 50% chance of occurring.

Note: PLEASE show the formulas and functions used for all of the answers in the Excel spreadsheet. Complete Base Case only.

Answered Same DayApr 12, 2022

Solution

Prateek answered on Apr 12 2022
11 Votes
BASE CASE
    VALUE DRIVERS
    Project Timeline (in years)    5
    Land Purchases in 2007    10,000,000
    Infrastructure Cost    1,000,000
    R& D Cost    500,000
    Cost of Building and Equipment    28,000,000
    Marketing Cost    250,000
    Depreciation (Factory & Equipment)    7 year straight line
    Opportunity Cost    10,000,000
    Salvage Value of Factory & Equipment after 5 years    5,000,000
    Revenue in Year 1    45,500,000
    Immediate Cash Inflow by Selling another...
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