Example: Majestic Mulch and Compost Company (MMCC)

Example: Majestic Mulch and Compost Company (MMCC)
MMCC is investigating the feasibility of a new line of power mulching tools aimed at the growing number of home composters. Based on exploratory
conversations with buyers for large garden shops, it projects unit sales as follows: year 1 = 3,000unit; year 2 = 5,000unit; year 3 = 6,000unit;
year 4=6,500unit; year 5=6,000unit; year 6=5,000unit; year 7=4,000unit; year 8=3,000unit. The new power mulcher will be priced to sell at $120 per unit to start.
When the competition catches up after three years, however, MMCC anticipates that the price will drop to $110.
The power mulcher project will require $20,000 in net working capital at the start. Subsequently, total net working capital at the end of each year will be about
15 percent of sales for that year. The variable cost per unit is $60, and total fixed costs are $25,000 per year.
It will cost about $800,000 to buy the equipment necessary to begin production. Straight line method depreciation; 8 years.
The equipment will actually be worth about 20 percent of its cost in eight years, or 0.2x$800,000=$160,000. The relevant tax rate is 34 percent,
and the required return is 15 percent. Based on this information, should MMCC proceed?
Annual Depreciation, power mulcher project

Year
Straight Line Method
800,000
Depreciation
Changes in net working capital, power mulcher project

Ending Book Value
Year
0.125
0.125x$800,000=
100,000
700,000
0.125
0.125x$800,000=
100,000
600,000
0.125
0.125x$800,000=
100,000
500,000
0.125
0.125x$800,000=
100,000
0.125
0.125x$800,000=
0.125
7
8
Revenue
NWC
Cash Flow
20,000
-20,000
360,000
54,000
-34,000
600,000
90,000
-36,000
400,000
720,000
108,000
-18,000
100,000
300,000
715,000
107,250
750
0.125x$800,000=
100,000
200,000
660,000
99,000
8,250
0.125
0.125x$800,000=
100,000
100,000
550,000
82,500
16,500
0.125
0.125x$800,000=
100,000
440,000
66,000
16,500
330,000
49,500
16,500
Projected Total Cash Flow, power mulcher project

Year
0
Capital spending
-800,000
Changes in NWC
-20,000
8
105,600
-34,000
-36,000
-18,000
750
8,250
16,500
16,500
66,000
Unit price (P)
120
120
120
110
110
110
110
110
Unit sales (Q)
3,000
5,000
6,000
6,500
6,000
5,000
4,000
3,000
Revenues
360,000
600,000
720,000
715,000
660,000
550,000
440,000
330,000
Variable costs
180,000
300,000
360,000
390,000
360,000
300,000
240,000
180,000
Fixed costs
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
Depreciation
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
EBIT
55,000
175,000
235,000
200,000
175,000
125,000
75,000
25,000
Taxes (0.34)
18,700
59,500
79,900
68,000
59,500
42,500
25,500
8,500
Net Income
36,300
115,500
155,100
132,000
115,500
82,500
49,500
16,500
Depreciation
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
Cash flow
136,300
215,500
255,100
232,000
215,500
182,500
149,500
116,500
102,300
179,500
237,100
232,750
223,750
199,000
166,000
288,100
Cumulative CF
-820,000
1. Payback Period (PP)

Tahun
Cash Flow
Cummulative
102,300
102,300
1
179,500
281,800
2
237,100
518,900
3
232,750
751,650
4
223,750
975,400
5
199,000
1,174,400
6
166,000
1,340,400
7
288,100
1,628,500
8
2. Average Accounting Return (AAR)

Tahun Net Income
Book Value
36,300
700,000
1
115,500
600,000
2
155,100
500,000
3
132,000
400,000
4
115,500
300,000
5
82,500
200,000
6
49,500
100,000
7
16,500
0
8
Total
702,900
2,800,000
Average 87,862.50
350,000.00
3. Net Present Value (NPV)

0.15
Tahun
Cash Flow
DF (15%) Present Value
-820,000.00
1
-820,000.00
0
102,300.00
0.8696
88,956.52
1
179,500.00
0.7561
135,727.79
2
237,100.00
0.6575
155,897.10
3
232,750.00
0.5718
133,075.57
4
223,750.00
0.4972
111,243.29
5
199,000.00
0.4323
86,033.19
6
166,000.00
0.3759
62,405.55
7
288,100.00
0.3269
94,180.40
8
NPV =
47,519.41
AAR = 0.2510357
4. Internal Rate of Return (IRR)

Tahun
Cash Flow
DF(20%)
-820,000.00
1
0
102,300.00
0.8333
1
179,500.00
0.6944
2
237,100.00
0.5787
3
232,750.00
0.4823
4
223,750.00
0.4019
5
199,000.00
0.3349
6
166,000.00
0.2791
7
288,100.00
0.2326
8
NPV =
IRR =
16.57%
0.20
Present Value
-820,000.00
85,250.00
124,652.78
137,210.65
112,244.41
89,920.11
66,644.70
46,327.55
67,002.85
-90,746.96
0.15
DF (15%)
1
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
NPV =
NPV =
Present Value
-820,000.00
88,956.52
135,727.79
155,897.10
133,075.57
111,243.29
86,033.19
62,405.55
94,180.40
47,519.41
5. Profitability Index (PI)

Tahun
Present Value
-820,000.0000
0
88,956.5217
1
135,727.7883
2
155,897.0987
3
133,075.5679
4
111,243.2945
5
86,033.1916
6
62,405.5486
7
94,180.4010
8
867,519.4124
PI =
1.06
47,519.41
Cost
Benefit
Tahun
1
2
3sd5
IRR =
Cash Flow
-8,000.00
2,500.00
3,400.00
3,400.00
3,400.00
20.32%
DF(10%)
0.9091
0.8264
2.0553
Present Value
-7,272.8000
2,066.0000
6,988.0200
1,781.2200
DF (24%)
0.8065
0.6504
1.2886
Present Value
-6,452.0000
1,626.0000
4,381.2400
-444.7600
DF (20%)
0.8333
0.6944
1.4629
Present Value
-6,666.4000
1,736.0000
4,973.8600
43.4600

Example: Majestic Mulch and Compost Company (MMCC)

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Annual Depreciation, power mulcher project

Straight Line Method

Changes in net working capital, power mulcher project

Projected Total Cash Flow, power mulcher project

Unit price (P)

Unit sales (Q)

1. Payback Period (PP)

2. Average Accounting Return (AAR)

3. Net Present Value (NPV)

4. Internal Rate of Return (IRR)

5. Profitability Index (PI)

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