Finance - The Mountain Bike Corporation (MBC) is a subsidiary of the Bicycle Corporation (BC)
Question # 00033076
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Updated on: 11/24/2014 12:37 AM Due on: 11/24/2014
1. Description (INTRO)
The Mountain Bike Corporation (MBC) is a subsidiary of the Bicycle Corporation (BC).
BC manufactures racing bicycles and MBC represents BCs first attempt in the growing
mountain bicycle market. Due to the recent push by major cities to encourage the use of
bicycles as an alternative method of transportation, the bicycle industry has recently seen
a resurgence. BC has been a leader in the industry for 20 years, however its bicycles are
relatively expensive. BC set up MBC to compete with other low cost bicycle
manufacturers without tarnishing its reputation for high-quality bicycles. MBC will
produce bicycles for everyday use and for the weekend enthusiast.
2. Sales and Pricing Projections
The project is expected to last 11 years after which BMC will discontinue the All-Terrain
MTB bicycle. Projected annual sales and prices are given in the table below.
Year Unit Sales Price
1
100,000
$449.99
2
120,000
$449.99
3
130,000
$449.99
4
140,000
$449.99
5
135,000
$399.99
6
130,000
$399.99
7
130,000
$399.99
8
125,000
$399.99
9
125,000
$369.99
10
120,000
$369.99
11
115,000
$369.99
3. Cost Projections
The bicycle will require $4,500,000 in net working capital at the start. Subsequently, total
net working capital at the end of each year will be 30% of sales for that year. The
variable cost per bicycle is $200, and total fixed costs are $750,000 per year.
The bicycle project will incur selling, general, and administrative (SG&A) expenses
every year equivalent to 8 percent of sales. MBC is planning a very aggressive marketing
campaign in all major cities.
The bicycle will require an initial investment in industrial equipment of $7 million. The
industrial equipment will be sold at the end of the eleventh year for about 10% of its cost.
MBC will also acquire a new computer network system to control quality, process orders,
and improve communications with customers. It will also help CMC to monitor the
companys operations more effectively. The cost of the computer system will be $2
million including installation. MBC will also purchase $1 million worth of new furniture,
racks, and shelves to furnish and equip its stores throughout the country. MBC will not
sell the computer network system and the furniture at the end of the eleventh year since it
may use them for future projects.
Since the industrial equipment is primarily production machinery, it qualifies as ten-year
MACRS property. The computer network system qualifies as five-year MACRS
property. The furniture qualifies as seven-year MACRS property. The marginal tax rate
of the company is 30%. Your book has the MACRS percentages in chapter 9.
The equipment will be installed in an empty warehouse the BC acquired 7 years ago. At
the time, BC paid $250,000 for the warehouse.
5. Based on this information should MBC proceed?
a. Calculate the breakeven point.
b. Estimate the pro forma income statements and the projects cash flows: OCF,
Changes in NWC, Changes in FA, and FCF. THIS PART OF THE EXAM
MUST BE COMPLETED IN EXCEL.
c. Calculate NPV (in Excel) and explain why the firm should accept or reject the
project.
d. Calculate IRR (in Excel) and explain why the firm should accept or reject the
project.
e. Calculate the PI (in Excel) and explain why the firm should accept or the
project
OTHER INFO (I DONT KNOW IF YOU WILL NEED IT)
Cost of Capital
rice of
94. These bonds pay interest quarterly.
dividend of $2.5 next year. The dividend is expected to grow by 4.5 percent per year
indefinitely. The beta of the stock is 1.5.
dividend of $1.5 per share.
percent, and the risk-free rate is 2 percent.
MACRS %
The Mountain Bike Corporation (MBC) is a subsidiary of the Bicycle Corporation (BC).
BC manufactures racing bicycles and MBC represents BCs first attempt in the growing
mountain bicycle market. Due to the recent push by major cities to encourage the use of
bicycles as an alternative method of transportation, the bicycle industry has recently seen
a resurgence. BC has been a leader in the industry for 20 years, however its bicycles are
relatively expensive. BC set up MBC to compete with other low cost bicycle
manufacturers without tarnishing its reputation for high-quality bicycles. MBC will
produce bicycles for everyday use and for the weekend enthusiast.
2. Sales and Pricing Projections
The project is expected to last 11 years after which BMC will discontinue the All-Terrain
MTB bicycle. Projected annual sales and prices are given in the table below.
Year Unit Sales Price
1
100,000
$449.99
2
120,000
$449.99
3
130,000
$449.99
4
140,000
$449.99
5
135,000
$399.99
6
130,000
$399.99
7
130,000
$399.99
8
125,000
$399.99
9
125,000
$369.99
10
120,000
$369.99
11
115,000
$369.99
3. Cost Projections
The bicycle will require $4,500,000 in net working capital at the start. Subsequently, total
net working capital at the end of each year will be 30% of sales for that year. The
variable cost per bicycle is $200, and total fixed costs are $750,000 per year.
The bicycle project will incur selling, general, and administrative (SG&A) expenses
every year equivalent to 8 percent of sales. MBC is planning a very aggressive marketing
campaign in all major cities.
The bicycle will require an initial investment in industrial equipment of $7 million. The
industrial equipment will be sold at the end of the eleventh year for about 10% of its cost.
MBC will also acquire a new computer network system to control quality, process orders,
and improve communications with customers. It will also help CMC to monitor the
companys operations more effectively. The cost of the computer system will be $2
million including installation. MBC will also purchase $1 million worth of new furniture,
racks, and shelves to furnish and equip its stores throughout the country. MBC will not
sell the computer network system and the furniture at the end of the eleventh year since it
may use them for future projects.
Since the industrial equipment is primarily production machinery, it qualifies as ten-year
MACRS property. The computer network system qualifies as five-year MACRS
property. The furniture qualifies as seven-year MACRS property. The marginal tax rate
of the company is 30%. Your book has the MACRS percentages in chapter 9.
The equipment will be installed in an empty warehouse the BC acquired 7 years ago. At
the time, BC paid $250,000 for the warehouse.
5. Based on this information should MBC proceed?
a. Calculate the breakeven point.
b. Estimate the pro forma income statements and the projects cash flows: OCF,
Changes in NWC, Changes in FA, and FCF. THIS PART OF THE EXAM
MUST BE COMPLETED IN EXCEL.
c. Calculate NPV (in Excel) and explain why the firm should accept or reject the
project.
d. Calculate IRR (in Excel) and explain why the firm should accept or reject the
project.
e. Calculate the PI (in Excel) and explain why the firm should accept or the
project
OTHER INFO (I DONT KNOW IF YOU WILL NEED IT)
Cost of Capital
rice of
94. These bonds pay interest quarterly.
dividend of $2.5 next year. The dividend is expected to grow by 4.5 percent per year
indefinitely. The beta of the stock is 1.5.
dividend of $1.5 per share.
percent, and the risk-free rate is 2 percent.
MACRS %
-
Rating:
/5
Solution: Finance - The Mountain Bike Corporation (MBC) is a subsidiary of the Bicycle Corporation (BC)