Module 3 – Case
CASH FLOW ESTIMATION AND CAPITAL BUDGETING
Estimating Project Cash Flows
ABC Golf Equipment Corporation is considering venturing into the golf club
manufacturing business with a new driver golf club. As the CFO, it is your
job is to add the financial perspective to the decision. It is estimated that
the current cost (t=0) of the machinery to create the golf club would cost
$2,050,000 including all installation expenses. The company also expects
to have to maintain $100,000 of inventories associated with the
manufacturing of the golf clubs. The machinery is expected to last ten
years. The production equipment is expected to last ten years. The
project’s cash inflows are expected at begin during year 1 (t=1) and
continue through all ten years (t=10). The company expects to sell 500
golf clubs per year at an anticipated price of $500 per golf club. Operating
costs, excluding depreciation, are anticipated to be 75% of sales each
year. The pro
the equipment (i.e., there will be no gain or loss on sale of the equipment
at end of Year 5). The project’s cash inflows will begin during year 1 (t=1)
and will continue through all five years (t=5). The company expects to sell
600 widgets each year at a price of $500 per widget. Operating costs,
excluding depreciation, are anticipated to be 70% of sales each year. The
firm’s tax rate is 35%. Calculate:
1) The initial investment cash outlay, and assume that the equipment
requires $20,000 of supplies (i.e., working capital) be kept on hand at all
2) Straight-line depreciation
3) Operating cash flows for the 5-year period
1) Compute the initial investment cash outlay. This is the total cost of
equipment purchase ($285,000), installation and shipping ($25,000), and
change in net working capital ($20,000):
= $285,000 + $25,000 + $20,000
2) Calculate straight-line depreciation, where salvage value is $30,000 and
useful life of the equipment is 5 years:
= [($285,000 + $25,000) – $30,000] = $280,000
= ($280,000 / 5 years) =$56,000
3) Calculate operating cash flows, where CFt = (revenues – costs)*(1 – tax
CF1 = ($300,000 – $210,000)*(1 – 35%) = $58,500
CF2 = ($300,000 – $210,000)*(1 – 35%) = $58,500
CF3 = ($300,000 – $210,000)*(1 – 35%) = $58,500
CF4 = ($300,000 – $210,000)*(1 – 35%) = $58,500
CF5 = ($300,000 – $210,000)*(1 – 35%) = $58,500
= $58,500 x 5
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Computations (use Excel).
Use Excel to estimate the project’s cash flows. Presentation always
matter, but you want to make sure that Mr. Hillbrandt can easily follow your
work. He is a busy man.
Memo (use Word).
Write a memo to Mr. Hillbrandt and comment on the three questions
below. Limit the memo to four or five paragraphs since CEOs want an
initial succinct explanation to accompany the financial calculations. Start
with an introduction and end with a recommendation. Each of the four or
five paragraphs should have a heading.
1. If the manufacturer plans on using debt to finance the project, should
the estimated project cash flows be changed to reflect these interest
charges? Why or why not?
2. If the manufacturer spent $200,000 studying golf clubs last year, should
that cost be taken into account with this analysis? Why or why not?
3. If the manufacturer could rent out the factory that is storing the golf club
machinery for $80,000 a year, should that be taken into account with
this analysis? Why or why not?
Short Essay (use Word).
If ABC Golf Equipment Corporation goes ahead with this new
manufacturing venture, the company may no longer be allowed to
represent a competing brand of golf clubs that currently accounts for 20%
of its profits. Should this be considered in the analysis? Why or why not?
What other factors should be considered in making the decision?
Start with an introduction and end with a summary or conclusion. Use
headings. Don’t forget to reference your sources. Maximum length of two
Each submission should include two files: (1) An Excel file; and (2) A Word
document. The Word document shows the memo first and short essay last.
Assume a knowledgeable business audience and use required format and
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length. Individuals in business are busy and want information presented in
an organized and concise manner
(Done Paper) Module 3 – Case CASH FLOW ESTIMATION AND CAPITAL BUDGETING Case Assignment
Module 3 – Case
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