Solution to Case 03

Cash Flow Analysis

The Lazy Mower: Is it really worth it?

Questions:

1. Prepare a Pro Forma Statement showing the annual cash flows resulting from the Lazy Mower project.

(See table on next page)

| |0 |1 |
|Base | $ 46,162,736.36 |60.806% |
|Pessimistic | $ 36,143,876.79 |51.733% |
|Optimistic | $ 60,917,016.49 |74.153% |

3. Realizing that the CIC will demand some kind of sensitivity analyses, how should Dave and Rick prepare their report? Which variables or inputs are obvious ones that …show more content…
It calculates the sales level that has to be reached to get an NPV of zero. The firm would have to sell 9,017 units a year to get there. Even under the pessimistic scenario (15% lower sales than the the base case scenario), this sales level is way below the forecasted sales for each of the 10 years indicating that the Lazy Mower project should be undertaken.

6. Let’s say that the company had spent $500,000 in developing the prototype of the Lazy Mower. How should Dave and Rick treat this item in their report? Please explain.

This is a sunk cost and should not be included in the analysis. The money was spent prior to making the decision whether or not to accept the project.

7. Calculate the IRR of the project. Based on your calculations what would you recommend? Why?

Under the base case scenario, the IRR of the project is 61%. Since the weighted average cost of capital is 14%, the project is acceptable. The estimated cash flows indicate that the project will provide a rate of return that far exceeds the hurdle rate. Even under the worst case scenario, the IRR of 51.73% far exceeds the cost