Hoosier Camper, Inc. is a manufacturer of truck campers. Its current line of tru

Question

Hoosier Camper, Inc. is a manufacturer of truck campers. Its current line of truck campers are selling excellently. However, in order to cope with the foreseeable competition with other similar truck campers, HC spent $950,000 to develop a new line of deluxe truck campers that are more spacious. In addition, the deluxe truck campers are much lighter with LED lighting, aerodynamic front nose-cap, a one-piece fiberglass wet bath, expansive storage in the cab and some other highend features. The company had also spent a further $250,000 to study the marketability of this new model. HC is able to produce the new model at a variable cost of $4,750 each. The total fixed costs for the operation are expected to be $2,850,000 per year. HC expects to sell 20,000 campers, 25,000 campers, 18,000 campus, 16,500 campers and 12,500 campers of the new deluxe model per year over the next five years respectively. They will be selling at a price of $18,000 each. To launch this new line of production, HC needs to invest $500,000,000 in equipment which will be depreciated on a seven-year MACRS schedule. The value of the used equipment is expected to be worth $1,250,000 as at the end of the 5 year project life. HC is planning to stop producing the existing model entirely in two years. Should HC not introduce the new deluxe model, sales per year of the existing model will be 12,000 campers and 10,000 campers for the next two years respectively. The existing model can be produced at variable costs of $3,260 each and total fixed costs of $1,450,000 per year. They are selling for $14,500 each. If HC produces the new deluxe model, sales of the existing model will be eroded by 5,000 campers for next year and 6,000 campers for the year after next. In addition, to promote sales of the existing model alongside with the new deluxe model, HC has to reduce the price of the existing model to $11,000 each. Net working capital for the new deluxe model will be 15 percent of sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required. The first change in NWC is expected to occur in year 1 according to the sales of the year. HC is currently in the tax bracket of 35 percent and it requires a 14 percent returns on all of its projects. You have just been hired by HC as a financial consultant to advise them on this new deluxe truck camper project. You are expected to provide answers to the following questions to their management by their next meeting which is scheduled sometime next month.

-What are the cash flows of the project for each year? (95 points)

Explanation / Answer

Time line 0 1 2 3 4 5 Cost of new machine -500000000 =Initial Investment outlay -500000000 7 yr MACR% 14.29% 24.49% 17.49% 12.49% 8.93% 22.3100% Sales of new campers 20000 25000 18000 16500 12500 Sales of old campers 7000 4000 Profits from new camper =no. of units sold * (sales price - variable cost) 265000000 331250000 238500000 218625000 165625000 Profits from old camper =no. of units sold * (sales price - variable cost) 54180000 30960000 -fixed cost for new camper -2850000 -2850000 -2850000 -2850000 -2850000 -fixed cost for old camper -1450000 -1450000 -Depreciation =Cost of machine*MACR% -71450000 -122450000 -87450000 -62450000 -44650000 -111550000 =salvage book value -Working capital =15% of new campers revenues -54000000 -67500000 -48600000 -44550000 -33750000 =Pretax cash flows 189430000 167960000 99600000 108775000 84375000 -taxes =(Pretax cash flows)*(1-tax) 123129500 109174000 64740000 70703750 54843750 +Depreciation 71450000 122450000 87450000 62450000 44650000 =after tax operating cash flow 194579500 231624000 152190000 133153750 99493750 reversal of working capital 248400000 +Proceeds from sales after tax =selling price* ( 1 -tax rate) 812500 +Tax shield on salvage book value =book value * tax rate 39042500 "=Terminal year after tax cash flows 288255000 Total Cash flow for the period -500000000 194579500 231624000 152190000 133153750 387748750

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.